If you have ever bought a home, or are in the process of doing so, you will most likely have encountered the concept of lenders mortgage insurance (LMI). Just one extra fee on top of the price of affording a home. However, as inconvenient as lenders mortgage insurance is, it serves a purpose and may even be useful to you. Therefore, understanding and knowing how to calculate lenders mortgage insurance may be vital to a smoother mortgage application.
Please note, specific ideas and products presented in this article may not be on offer by Monzi nor the lenders we work with. This article presents only general information. Consider seeking professional financial, taxation, legal or other advice to check how the information and ideas presented on this website relate to your unique circumstances.
What is lenders mortgage insurance?
Lenders mortgage insurance is there to protect your lender from the risk of potentially lending to you. It is an extra fee that gets added to your mortgage if your deposit is insufficient.
While several factors influence the significance of your LMI, paying it may allow your lender to lend you a more significant sum. However, the idea should be that your lender never has to claim their insurance policy. Your goal should be to avoid defaulting on your loan and ensure the sale value of the property will be higher than the unpaid mortgage value.
What affects the cost of lenders mortgage insurance?
Several factors may either increase or decrease the size of the lenders mortgage insurance sum. It may be possible that only some of the following apply:
Your deposit amount
The size of your home loan deposit will determine if you must pay LMI and how much it will cost. Typically, your deposit should be equivalent to 20% of the property value. This means that your loan to value ratio is 80%. With this, you would avoid LMI all together. If your deposit is less than 20%, lenders mortgage insurance is going to apply. The smaller the deposit, the larger the LMI.
The loan’s size
The risk of a loan increases with the loan amount. Therefore, if you are borrowing a tremendous amount of money, your lender’s mortgage insurance will increase to cover the potential risk.
Your employment status
How stable your job is may also be an influencing factor. For example, if you are a full-time worker, you are going to come with less risk than a casual worker. An unpredictable industry may also be an influence.
Investment or owner-occupier
This may not apply in all cases, however, if you intend to use the property as an investment, then you may have a higher LMI. This is most likely because if you have financial troubles, you are more likely to maintain your owner-occupied home first.
Your lender’s insurance company
Just like any regular insurance, your lender has to take out a policy for their lenders mortgage insurance. Therefore, as with any other insurance, premiums and policies may vary. This may impact how much you pay.
When do you pay lenders mortgage insurance?
Lenders mortgage insurance is a one-time fee that you can either pay upfront or add onto your variable rate home loan. If you choose to simply add it to your mortgage, while the mortgage will increase, it won’t feel like you are paying extra. This is because it will merely become a part of your monthly repayments.
Protection insurance vs lenders mortgage insurance
Try to avoid a potential mix up between protection insurance and LMI. Protection insurance is there for you, whereas lenders mortgage insurance is there for the lender. Also called mortgage protection insurance, this insurance is there to cover you if you cannot make your repayments.
Acceptable reasons for not making your repayments include illness, unemployment, injury, or death. Any other reasons you may have, you will have to enquire about with your mortgage protection insurance provider.
How to calculate lenders mortgage insurance
Previously, we discussed the influences on the size of your LMI. However, knowing these factors is not necessarily enough to calculate your lenders mortgage insurance. One way to simplify this is to use a mortgage lenders insurance calculator, also called an LMI calculator. Keep in mind that these calculators only generate estimates and not exact figures.
Essentially, you will need to enter the value of your property, the size of the loan you need, and whether or not you are a first home buyer. The calculator will then predict your total premium amount. This can be useful as it is a good way of working out what size you will need your deposit to be, to fit your budget. Some of these calculators will also give you the option of changing the loan-to-value ratio (LVR), so you can see how your payments might change.
What is a loan-to-value ratio?
This then leads to the concept of loan to value ratio (LVR). Displayed as a percentage, LVR is the amount you’re borrowing, out of the values total property. Keep in mind that these calculations combine additional fees such as conveyancing and stamp duty.
Ideally, you should be aiming for a loan to value ration of 80% or less. Which means that you will need to put down a deposit of at least 20% to avoid the lenders mortgage insurance. While there are lenders that are willing to fund high LVR loans, as the risk increases, so too will your LMI.
How can you avoid lenders mortgage insurance?
If you believe you are firmly against the idea of paying LMI, there are a few potential ways to get around it or decrease it. The most obvious is to meet the 20% deposit requirement. However, this is not always possible. If you are looking to buy a $500,000 house, then your deposit will need to be $100,000, which is difficult to manage.
Instead, you could try lowering the amount you want to borrow, even if it is only $1,000 less. Whilst this won’t entirely remove the LMI, it may decrease it so that it is more manageable. Alternatively, use a guarantor. A guarantor is a co-signer who may use their own home as security for your loan, thereby boosting your deposit.
Shopping around and choosing the right lender who has a good insurer can mean your LMI will decrease. See if you can find a lender that uses a discounted LMI insurer. This may be difficult, however, as they don’t publically publish the insurer they’re with, so you may have to base this on word of mouth. Unless you are in the right industry or deposit 20%, it is unlikely you can avoid the LMI.
Which professions allow LMI to be waived?
Yes, you did read that correctly, some professions may receive waived lenders mortgage insurance. However, this is not because these industries struggle with paying their bills; in fact, it is the opposite.
Legal, medical, accounting, and finance fields may potentially not have to pay any LMI. It is important to note that this does not include every position in these industries, only more skilled jobs. For example, surgeons may not require LMI, but nurses will. These roles are highly qualified and often relatively stable. Due to the stability they offer, the lender will be less cautious of job loss and may view these applicants as more reliable. You may also qualify for this if your partner is the one who works in one of these industries, but not yourself.
However, merely working in one of these fields does not mean automatic eligibility. You will still need to pass the lender’s additional criteria first.
Is it better to pay the lenders mortgage insurance?
People often wonder if it is smart to pay the LMI? In some cases, the answer is yes. Depending on your circumstances, however, if you are quite far off the 20% deposit, it may be better to pay the LMI rather than delaying your loan. That way, you may be able to own a home sooner
That said, if you are close to reaching your 20% deposit, then it may be better to wait. For instance, if you need $5,000 more for the 20% deposit, it may be better to wait and save this up. If you need $20,000 more, then paying an $8,000 LMI may be in your best interest. It all comes down to whether you will actually save any money if you delay your loan. Ultimately, while it is an extra expense, in some cases, it may be worth it, if you decide that it’s what’s best for your circumstances.
Stamp duty on lenders mortgage insurance
Stamp duty is an additional tax applied to certain documents and transactions. You will more commonly hear of stamp duty on the sale of a property. However, stamp duty also applies to lenders mortgage insurance. Stamp duty varies by state and may be avoidable depending on the lender you’re dealing with.
This is because some lenders have “risk fees” instead of LMI. Risk fees are not technically a form of insurance. Therefore, the stamp duty does not apply. A risk fee is often less than the total LMI, which may also be beneficial.
Does lenders mortgage insurance vary by state?
Yes, LMI does vary according to the state you are looking to buy your home in. This is a result of added stamp duty. For example, lenders mortgage insurance QLD may have a 9% stamp duty increase. Whereas, lenders mortgage insurance TAS may have a 10% increase.
Keep in mind that this is the stamp duty applied to the LMI premium. Stamp duty added to a property purchase is a different fee. GST may also apply to your total LMI; this is all presented as one figure.
Can lenders mortgage insurance be refunded?
No, it would be scarce to find a lender who may refund an LMI. Before 2012, this was a possibility providing you repaid your mortgage within two years. Now, however, your lender is more likely to offer you a lower premium instead.
Keep in mind that you may be able to eliminate these issues by using your LMI calculator and comparing the market and loan features, before entering a contract.
Is lenders mortgage insurance transferable?
If you are planning to refinance your fixed-rate home loan, you may be curious about whether or not your LMI will be transferable. Currently, this is not possible. Meaning, even if you refinance, you will still owe LMI to your previous lender.
However, if you are going to refinance within the same company, you may become eligible for a discount. You may also receive a discount if you are staying with your lender, but increasing the size of your loan.
Will paying lenders mortgage insurance increase approval time?
It is worth noting that if you are going to pay the LMI, your processing time may increase. This is because your application will then have to be looked over twice. Not only will your lender have to support it, but so will their insurer. They both need to agree for the application to progress.
High LVR loans
High LVR loans are loans that allow you to borrow more than 90% of the property’s value. For instance, if you wanted to apply for a 95% LVR, your deposit would only need to be 5%. This is especially handy if you looking to buy a home fast.
To be eligible for this kind of loan, however, you will need to satisfy some criteria. Firstly, you will need a strong credit history, with minimal or no other debts. You will also need stable employment, a total 5% deposit, and preferably own some assets.
Beyond this, there is also base eligibility, which includes being at least 18 and an Australia citizen or permanent resident. You will also need proof of your employment and to be able to show income history.
Lenders mortgage insurance will be quite large on a high LVR loan. Meaning you may be better off aiming for an acceptable LVR of 80%.
Getting lenders mortgage insurance quotes
QBE and Genworth are the two major lenders mortgage insurance providers in Australia. However, some lenders may self-insure for individuals based on circumstances. Hence, before you embark on your journey to becoming a homeowner, you may be able to ask individual financial institutions for estimations on the LMI costs.
The differences in costs across financial providers may be significant. Therefore, by asking some specific, targeted questions, you may be able to save a decent sum if you don’t have a 20% deposit you intend to use.
First Home Loan Deposit Scheme
New in 2020, the First Home Loan Deposit Scheme is allowing eligible first home buyers the chance to have any potential LMI waivered if they place a minimum deposit of 5%.
How this works is that the government will play the role of the mortgage insurer, meaning that if you can produce the deposit, the government will guarantee the home loan. This can be very useful if you are a young person working to secure your first home. Keep in mind that this scheme only has so many places and may not last forever.
For more details, visit the National Housing Finance and Investment Corporation website.
The pros and cons of lenders mortgage insurance
As with all things loans, there are always pros and cons. In the case of LMI, there are reasons it may be useful, but also reasons it might not. Regardless of the following pros and cons, you do need to compare them to your financial situation and make a decision for yourself.
Advantages
- You can add it to your loan: This is not a fee that will need to be paid in cash, meaning you won’t have to empty your account upfront to cover it.
- May help you expand your portfolio sooner: If you are using the property as an investment, paying the LMI will potentially speed up your portfolio expansion.
- If it is for an investment, you will earn it back: Paying the LMI means you can get tenants in sooner, and potentially earn back the cost of the LMI.
- Allows you to purchase and move into your new home sooner.
Disadvantages
- If your deposit is small, it will be a more significant fee: A 5% deposit sounds great until you have to pay a much larger LMI to cover the risk you may present.
- May put you over budget: If you are already working to the constraints of your budget, adding an LMI on the top may put you over the edge.
- May mean you have to save longer to avoid it: Going over budget means you will then have to wait longer for your home while you save up to increase your budget or meet the 20% deposit.
How do lenders value your property?
When the bank conducts a valuation of your property, they will be looking at many factors. Some of these include its location, age, type and condition. A home that is structurally falling apart is going to be a lot cheaper than one that is newly built.
Location is another vital factor if your intended home is right on the beach; it’s going to be far more expensive than the house that is out in the bush. Essentially the valuation has to be unbiased and fair according to the actual state of the property.
Once the valuation is complete, your lender will compare you against the property and decide as to whether or not you can afford the loan. Even with perfect credit history and a good income, some properties may not be within your price bracket. Your lender needs to ensure that you can afford any mortgage loan you take out.
Lenders mortgage insurance on investment properties
When it comes to investment properties, lenders mortgage insurance may look slightly different. As a start, LMI can be tax deductible on investment properties. This includes the LMI stamp duty and any GST. However, you cannot claim it immediately. Instead, the investor may claim it back over five years. Unless your borrowing expenses were under $100, you can’t claim in the first year.
You may also only claim back LMI for the period where the property is a rental with inhabiting tenants. If you decide to stop renting it out, you will have to pay the rest of the LMI on your own.
Sacrificing loan features vs interest rate
When it comes to choosing a loan, conflict tends to arise when deciding whether to favour a reasonable interest rate or useful features. Of course, everyone wants to aim for the lowest interest rate they can find. Yet, is this always the best option for you if it means you will be preventing yourself from claiming certain features?
When it comes to home loan interest rates, you need to decide whether it will be fixed or variable. A variable-rate often permits you more features, whereas a fixed rate is more comfortable to budget for.
When it comes to what loan features, try to avoid options you won’t use. If you find yourself thinking you probably won’t need it, but it could be nice to have, prioritise the interest rate. However, if you think you are going to need flexibility as a critical feature of your loan, you may prioritise this over the interest. One example may be an offset account.
It is essential to look to the future and work out if you foresee job changes or new families members that may mean you’ll need to change your loan. Remember that if you decide your loan is not working for you, you can always refinance to suit your needs better.
Using a guarantor to avoid lenders mortgage insurance
If you are still looking to avoid having to pay an LMI, one option is a guarantor. A guarantor is typically a close relative that can provide additional security to your loan. For instance, it may be your parent or grandparent. Your chosen guarantor will sign part of their own home’s equity to your loan to boost your deposit.
Your guarantor will not need to use any cash as they are merely signing their equity as collateral. Note that your guarantor typically must be a direct relative or spouse. Friends, business associates or other such individuals will often be ineligible.
If you then fail to repay your loan, your guarantor may have to cover the payments on your behalf. If someone has asked you to be a guarantor on their home loan, you should consider financial and legal advice before making a final decision.
This type of contract can be a burden to your guarantor if you let things get out of hand. Whilst it can potentially allow you to borrow 100% of the loan if you drop the repayment ball, you may put your guarantor in a tricky situation. Consider your options as well as any risks before opting to use a guarantor.
Using a gift to avoid lenders mortgage insurance
Aside from having a guarantor, there is one more option available to you for avoiding the LMI. This is to receive all or part of the deposit as a gift from your parents. This money cannot be a loan. If you must repay the deposit to your parents, then it qualifies as a loan and may not be accepted.
If it is a true gift, then the bank will require evidence of this. This usually can come in the form of a statement/letter from your parents saying that you will not repay it and that it is non-refundable. Whether or not a lender accepts this depends on who you go with.
If you do receive a loan for your deposit, you need to ensure you can afford to repay them alongside your mortgage repayments.
Stamp duty and conveyancing on your home loan
If you’re a first home buyer, you may not know of all the extra costs that go into. Depending on the house, you may end up paying an additional $20,000 on top of your loan. This is a result of extra fees the come into play when signing the legal stuff and ensuring the property you intend to buy doesn’t have any accompanying nasty issues.
Two standard fees you may encounter are stamp duty and conveyancing. Stamp duty is a tax you pay on any property you buy, mostly for the transactions and documents. If you have chosen a million-dollar house, your stamp duty will be higher than on a property worth half this. However, if this is your first home, the government may waive your stamp duty.
Conveyancing is for the legal stuff. Conveyancers will sort out all your paperwork and documents for you. Whilst possible to do yourself, if you’re a first-home buyer, using a professional may be smart. Consider putting aside $2,000 for conveyancing, should you require it.
Find a lender who can help!
Home loans aren’t our forte. But, here at Monzi, you won’t need to pay any lenders mortgage insurance to take out a loan.
We an online lender-finder service. Not only this, but we are also Australian-run, fully paperwork free, and easy to use. If you require a personal loan of $300 to $10,000, we’re ready to give you a hand.
All you have to do is click ‘apply now’ and fill out a few details about yourself. We’ll take the rest from there and do our best to match you with an available lender ASAP.
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