If you’re buying a property, Lenders Mortgage Insurance (LMI) is a cost you might need to factor in if the deposit you’ve saved is below a certain amount. In this article, we look at how Lenders Mortgage Insurance works and who needs to pay it, as well as answering frequently asked questions such as whether you can claim LMI as a tax deduction.
What is LMI?
Understandably enough, many people’s first question is simply, “What is Lenders Mortgage Insurance?”. LMI is a type of insurance that borrowers with a smaller deposit need to pay for when they take out a home loan. It covers the lender (not you, the borrower) from financial loss if you cannot repay your loan.
It’s often confused with another type of insurance called Loan Repayment Insurance. The key difference is Loan Repayment Insurance protects the borrower, while LMI only covers the lender.
LMI is a one-off payment made by the borrower and is usually added to the total loan amount so that there is no upfront cost. However, adding LMI to your home loan amount means you would pay interest on the LMI amount as well.
Who needs to pay for LMI?
If you are borrowing over 80 per cent of the value of a property (in other words, your deposit is less than 20 per cent), you will need to pay LMI.
The relationship between the value of the property and the amount you’re borrowing is known as the Loan to Value Ratio (LVR). If you save up a bit more of a deposit - and bring your LVR down to 80 per cent - you will avoid having to pay LMI.
Why LMI is actually a good thing
While nobody enjoys paying extra for stuff, the fact is that LMI allows prospective buyers to own a home sooner than they otherwise would.
According to a report released in 2022, “As of June this year, CoreLogic estimates it would have taken 11.3 years for the median income household to accumulate a 20 per cent home loan deposit. This reflects a median value of Australian homes at approximately $752,000, or a 20 per cent deposit of just over $150,000.”
In other words, house prices have reached a point where scrimping together 20 per cent for a deposit simply isn’t realistic for large numbers of people. LMI, while an additional cost, does at least offer a way around the problem.
How much is Lenders Mortgage Insurance?
The cost of LMI varies from borrower to borrower, and usually depends on factors that include:
- The size of the loan
The bigger the loan, the bigger the risk to the lender, so the more you would have to pay for LMI.
- The size of your deposit
The bigger the deposit you have saved up, the less you are likely to pay in LMI. As mentioned already, a deposit of 20 per cent or more means you’ll avoid LMI completely.
- The type of loan
For example, LMI for an investment loan will usually cost more than an equivalent loan for a home that the buyer intends to live in.
In many cases, your lender will arrange for LMI through a separate insurer as part of the home loan process. In these cases, it’s the insurer, and not the lender, who will determine the cost of LMI.
When it comes to Lenders Mortgage Insurance, there are a number of questions that pop up regularly. Here are some of the most frequently asked:
How can you avoid Lenders Mortgage Insurance?
The obvious answer is, have a 20 per cent deposit saved. But given that the average person would rather not wait 11.3 years, it isn’t much help. There is another way though.
Several government schemes exist to enable eligible first-time buyers to avoid LMI with a deposit of just five per cent. In fact one of them, the Family Home Guarantee, allows eligible single parents to buy a home without LMI for as little as two per cent!
When do you pay Lenders Mortgage Insurance?
LMI is either paid upfront at settlement or can be rolled into the total cost of your home loan. As mentioned earlier, rolling it into your loan means you will need to pay interest on it.
Is Lenders Mortgage Insurance a one-off payment?
Yes, LMI is a one-off, non-transferrable payment.
Can you claim LMI as a tax deduction?
For investor loans, yes. The Australian Tax Office allows deductions for borrowing expenses associated with the purchasing of an investment property, which includes LMI. This deduction is either spread over five years or the term of the loan, whichever is shorter.
We’re here to help
If you would like to discuss LMI, or any other aspect of the homebuying process, feel free to give us a call on 133 282. Alternatively, you can always pop into your local branch for a chat.
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