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What is Lender’s Mortgage Insurance and who needs to pay for it?

23 May 2018

If you’re looking to buy a property, Lenders’ Mortgage Insurance (LMI) is one additional cost you might need to factor in if the deposit you’ve saved up is below a certain amount.

What is LMI?

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 up-front 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% of the value of a property (in other words, your deposit is less than 20%), 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 deposit - and bring your LVR down to 80% - you will avoid having to pay LMI.

How much does LMI cost?

The cost of LMI varies from borrower to borrower, and usually depends on factors that include:

  1. 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.
  2. 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 if you have a deposit of 20% or more you’ll avoid LMI completely.
  3. 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.
  4. Your employment status - borrowers who are seen as a bigger risk (those in casual employment, for example) may have to pay more.

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.

More help for home buyers

If there’s any other aspect to buying a home that you’d like to know more about, we can guide you through it. Whether it’s help with a loan application or pre-approval, or just discussing your plans with an expert, our Home Loan Specialists are here to support you along the way.

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Important information: Please note that this is only intended as a general guide in relation to issues you may want to consider when buying a home. It is not intended to be an exhaustive list of all relevant issues and does not take into account your personal needs and financial circumstances. You should take into account your own particular circumstances, and obtain independent expert advice where needed, before proceeding. Examples quoted are indicative only for illustrative purposes.

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