What is lenders mortgage insurance?
Lenders mortgage insurance (LMI) is an insurance policy obtained by the lender, but paid for by the borrower, that protects the lender if the borrower defaults on their loan agreement. In this event, the insurance covers the lender for any shortfall if the property is sold to pay off loans. Any remaining debt can be passed from the lender to the insurer who may then seek payment from the borrower or guarantor.
Borrowers typically need lenders mortgage insurance for any loan deemed to be in a higher-risk category—usually when loan limits exceed 80% of the property value.
The main benefit to the borrower is that they can access low deposit home loans. Lenders mortgage insurance is not just something to help first time buyers with low deposits, it is available to many types of borrowers including upgraders and investors.
Why does lenders mortgage insurance exist?
It all comes down to risk. Lenders need to have some cover in case borrowers do not meet their loan repayment obligations. Banks can cover some of their lending risk by asking borrowers for bigger deposits (like 20%). That is okay for some, but many borrowers might miss out on home ownership opportunities without deposit options of less than 20%.
Whether you can save a 20% deposit is up to your individual circumstances. In June 2022, an ANZ CoreLogic report estimated it took 11.3 years to save a 20% deposit—oh, and this compares to only 6.7 years twenty years ago. This measure was based home values not moving at all within this timeframe too. No wonder saving a deposit can be hard.
LMI provides an opportunity for buyers to access low deposit home loans without a 20% deposit.
Who does lenders mortgage insurance protect?
The lender, not the borrower. It might sound like an unfair upfront cost, but it is a way for borrowers with smaller deposits to access low deposit home loans.
How is LMI arranged?
When a borrower applies for a loan that needs lenders mortgage insurance in Australia, the lender will arrange the insurance as it is their policy, not the borrowers.
There are a few variations of lenders mortgage insurance which differ depending on lender regulation as well as borrower and property scenarios.
Typically, a lender will fully assess a low deposit home loan application against existing lending policy. They ultimately support the application for an approval or decline it.
Some lenders have agreements with the mortgage insurer so that if the loan falls within certain thresholds the LMI policy is automatically approved for the loan.
A broker is a great contact to explain LMI:
If the lender has no such relationship with a mortgage insurer, or the loan falls outside of the agreed terms for automatic approval, the mortgage insurer will perform a secondary assessment of the application according to their own policy. In this case there are two separate lending assessments done for the one application. It is not uncommon for a lender to provide support for a loan approval only to see the loan declined after assessment by the mortgage insurer.
Lenders mortgage insurance is typically put in place the day the loan start. For buyers, that should be the day of settlement. These fees are all related to risk and deserve some attention in any loan comparison exercise. They are just one of many loan aspects to be compared.
How much is lenders mortgage insurance?
The cost of lenders mortgage insurance in Australia can be very significant. It is a percentage-based fee than changes with loan amount and lending ratios.
If the lending ratio is remains the same but the loan sizes differ, the bigger the loan the bigger the lenders mortgage insurance cost. Also, for the same borrowing amount, a 90% LVR loan should attract a higher mortgage insurance premium than a loan at 85% LVR.
Below is an illustration showing how much a deposit size can affect the amount of lenders mortgage insurance charged.
For example, a person buying a property worth $600,000 with a $30,000 (5%) deposit would need to borrow 95% of the purchase price. They may be required to pay a lenders mortgage insurance premium in the region of $24,000.
Another person buying the same property with a $60,000 (10%) deposit, so only borrowing 90% of the property value, may only have to pay in the region of $13,200 in LMI.
LMI premiums can also vary depending on the amount of the loan required. That same person with a $40,000 (10%) wishing to purchase a property worth $800,000 would need to borrow 95% of the higher purchase price. Their LMI premium may be in the region of $37,000.
These examples deal with deposit size only and not any other costs of buying a house (like stamp duty). Essentially, the more you can save for a house deposit the lower your LMI cost can be.
Some other factors that may impact the cost of lenders mortgage insurance could be your employment type and whether you are buying a home or refinancing.
How do I pay for lenders mortgage insurance?
Many lenders offer borrowers the option to add the premium to their loan amount.
Given the loan will incur interest costs some borrowers may not feel comfortable doing this. However, if a borrower has access to savings for lenders mortgage insurance, they might rather consider increasing their deposit instead. By putting up a bigger deposit they could lower the loan amount required—which in turn reduces the LMI cost.
Given some lenders can add LMI onto the loan, they need to include this amount in any loan affordability assessments. Lenders also need to watch their own exposure to a loan scenario, so most will try to keep borrowing to within 95% (including the LMI premium). This means that the initial deposit might need to be closer to 8% or 9% to leave room for any LMI cost to be added.
Is LMI worth it?
A common question. Many try to answer this question for you—most are guessing.
Whether LMI is worth it is up to you to determine, perhaps with some mortgage broker guidance along the way. If you choose a low deposit home loan option and pay LMI you are not alone. In the three months to June 2022, APRA reported 32.1% of all new residential lending was for loans over 80%.
To see if LMI is applicable to your situation see a licensed broker:
Perhaps putting some context around the question might provide some clarity.
“If I buy now, with a smaller deposit, and pay more in fees and interest on my home loan – Is it worth it?”
Probably not.
“But what if prices go up significantly?”
Then probably yes – it is worth it.
“But what if prices fall after I buy?”
Then no – it doesn’t sound worth it.
“But I have fixed my loan and the savings I make on paying my mortgage compared to rent and LMI mean I come out ahead in 4yrs.”
Then probably yes – it is worth it.
“But what if I do not plan on staying in the house for a very long time, the repayments are within my means, I am sick and tired of renting and a property has come up for sale on a street I really want to live on”
Then yes – it is probably worth it.
Saving a small or large deposit is not the only variable in buying a house. Sure, it is a big one. But rather than think you must save 10% or 20% because you heard it somewhere, ask a mortgage broker to put real figures next to your options. You can then consider these in the context of other factors like work, lifestyle and security to help decide whether to buy now or later.
So, I do not know if it is worth it for you. What I do know is that LMI provides an opportunity for buyers to enter the market earlier than they might have otherwise. While there is a premium payable for this opportunity, it is still that—an opportunity.
How to avoid lenders mortgage insurance
This is a fair question. Most borrowers wanting to buy a property with less than 20% deposit will need to pay lenders mortgage insurance.
It is certainly a premium only worth paying if you really need to. There are ways of avoiding it, some of which I explore here. Avoiding the cost of lenders mortgage insurance will depend on your eligibility as well as the suitability of the scheme or product to your individual financial situation —something a mortgage broker can assist you with.
Guarantor home loan
This is an arrangement where a family member might be in a good financial position to support your home loan application. A lender can work with them to help secure your home loan to the extent that you can avoid LMI. It will involve the guarantor offering something to the lender, say a property with sufficient equity. The borrower does the borrowing. The guarantor enters a legal agreement with the lender that would see them repay any shortfall if the borrower is not able to meet their repayment obligations.
Use equity
It seems obvious but some borrowers who already own a home might have seen property prices increase in value. Lenders are willing to reassess these values and base any new lending on the current value of the property, instead of the value when you bought it. This is how you can use property equity to buy a new home instead of savings.
Federal government guarantees
Did you know the Housing Australia, an Australian government scheme offers limited places to eligible borrowers to avoid LMI? Is is a guarantee arrangement similar in principle (but different) to a family guarantee home loan. The main similarity is that the home loan involves a third party (the government) who provides assurances to the lender that the debt will be covered in a scenario where the borrower cannot pay it. This is a way for borrowers to avoid paying lenders mortgage insurance.
The Home Guarantee Scheme offers a number of places to support the following types of borrowers the opportunity to avoid paying LMI (subject to meeting eligibility criteria):
- First home buyers
- Single-parent families
- Regional home buyers
Provided a first home buyer can contribute a 5% deposit, the First Home Guarantee (FHBG) is designed to enable access to major lenders and avoid paying lenders mortgage insurance with a 95% LVR home loan. The government guarantees 15% and so the lenders risk is kept to 80%.
The Australian Government has expanded eligibility criteria for its First Home Guarantee Scheme to include buyers who have not owned a home in the last 10 years. The Australian Housing and Urban Research Institute summarised other recent changes to the Government guarantee scheme which acknowledges non-spousal borrowers teaming up to borrow together.
Another Australian guarantee-scheme introduced is the Family Home Guarantee (FHG). This is aimed at helping single-parent families buy their own home with as little as 2% deposit. This could enable a 98% LVR home loan with the government guaranteeing 18%. It is not a requirement that they are first home buyers, the scheme is also open to previous home owners.
The Regional First Home Buyer Guarantee (RFHBG) provides additional places for those looking to purchase a home regionally.
There are plenty of conditions with limited places at participating lenders. A mortgage broker is well placed to assess availability, eligibility, and suitability of the program for your situation.
State government initiatives
Some Australian lenders are funded by State Government and can issue home loans with low deposits and avoid LMI (eligibility criteria apply). Keystart is one example in Western Australia. Open to more than just first home buyers they offer options to buy with as little as 2% deposit and avoid lenders mortgage insurance. As with some low deposit home loans the interest rates are often relatively high and there are restrictions on the type of home loan products you can have. A good mortgage broker can compare this option to other products suited to your situation.
There are numerous shared-equity schemes that consist of a joint-ownership agreement with a relevant state governments entity. These avoid LMI but are different to traditional ownership as the “shared” aspect suggests. Ask you mortgage broker for more information.
LMI waiver for professionals
LMI waivers exist—for some. As for all things home loan-related, LMI waivers for professionals require borrowers meet lender-specific eligibility requirements. When lenders consider eligibility for a professional LMI waiver, some criteria they look at is current role, income levels and relevant professional memberships.
Low deposit home loans are all about risk and lenders have insight into which segments of borrowers have (collectively) excellent repayment conduct. Given individuals within certain professions can be segmented quite easily, some lenders have created occupational categories where they will consider offering an LMI waiver.
Borrowers who meet the eligibility for LMI waivers might be able to buy with a 10% or even 5% deposit and avoid LMI. Given LMI costs can extend into tens of thousands, a waiver of these fees can be a significant saving.
I have listed some occupations and industries that may be eligible for LMI waivers below. The list is a sample only and I encourage you to engage your lender or mortgage broker to see if there is an LMI waiver that will suit your specific requirements.
- Medical Professionals. Primary health providers like doctors.
- Allied Health Professionals like physiotherapists, pharmacists, optometrists, nurses and chiropractors.
- Veterinarians
- Legal Professionals could be barristers or lawyers
- Accounting Professionals such as an auditor or finance director
LMI waivers will be subject to lender terms and conditions which can change.
Some ways to reduce LMI
There can be instances where you can keep you mortgage insurance premiums low by clever structuring of your loans and properties. There is a lot of talk around comparing home loan rates, but nothing stops you comparing LMI costs across lenders as well.
Sometimes different lenders have incentives to attract borrowers. Cash backs and refinance rebates are common incentives designed to attract new customers. Another incentive that lenders sometimes offer is a reduced or waived LMI costs for certain borrowers with less of an emphasis on meeting professional occupation requirements. As these are promotional in nature, it is not something to plan around. But worth discussing with your lender or broker in case a promotion or product is the right fit for you.
What to look out for with LMI
Besides providing low deposit home loan options for home buyers, LMI is also something that might come up again along your home loan journey—long after you have purchased your home.
When refinancing from one lender to another you will need to check your loan eligibility at the new lender with respect to LMI. It is not just a fee paid when you purchase a house. Whether or not you paid LMI in the first place, a refinance home loan requires further assessment which may include looking at your loan ratios again. If your lending ratio is over 80% based on current property values, then LMI could be cost consideration for your refinance home loan.
When buying with a low deposit be aware that loans with LMI will generally attract a more thorough assessment. In some instances, there are more assessment hurdles than your lender. Insurers need to consider their own risk just as lenders are mindful of theirs. Some areas where mortgage insurers might exercise caution is around the specifics of property type (house vs apartment), post codes (inner city vs suburban) and income type (casual vs permanent).
Loan Variations is an area where borrowers might be reminded of the role LMI plays in home loans. The insurance policy is linked to the loan that was established at the time of settlement.
If you want an increase to your loan which takes the loan limit once again over 80% of the current property value, you should not have to pay the full cost LMI again. What usually happens is that you pay a top up premium and so get some credit for any LMI already paid.
What sometimes happens is that borrower might use an improved equity position to refinance their loan to another lender under 80%. This will see the LMI policy dropped off the loan. So, if you then wish to top up to over 80% you are likely to pay the full cost of LMI all over again.
Can you get a refund of LMI?
Yes, partial refunds exist, but you will need to check with your lender or broker to see if you qualify. Usually, the original mortgage needs to be paid off and discharged within the first two years. This might happen with a refinance or sale for example.
Final word
As annoying as the costs associated with lenders mortgage insurance may seem, it also presents an opportunity for buyers wishing to purchase a house with a low deposit home loan.
Lending options with an LMI waiver or solutions that avoid LMI present significant upfront cost savings. Before jumping into home ownership, it makes sense to explore your borrowing and purchasing options with a mortgage broker or lender.
Table: LMI Guide by Deposit Size
*LMI – I have used Genworth LMI fee calculator: https://www.genworth.com.au/products/tools/lmi-fee-estimator
Insurers have commercial arrangements with lenders so LMI paid by a borrower (before any added duties) for a lender might be more or less than this figure
Amounts do not include and state government duty on insurance premiums
