First Home Buyer's Guide
Lender's Mortgage Insurance (LMI)
Lender’s mortgage insurance is the policy which you pay to protect your bank against loss if you default.
Lender’s mortgage insurance or LMI is a once off payment and is calculated as a percentage of the loan amount.
That percentage increases the higher the loan amount and the higher the percentage of the purchase price you want to borrow (known as loan to value ratio or LVR).
The three things you should know:
1. Thresholds
LMI is calculated based on whole percent LVR thresholds and loan amount bands. This means that small changed in LVR or Loan amount could have a big impact on the amount of LMI payable.
Example LMI Table
Consider the difference just $5,000 extra deposit could make if you were purchasing a $325,000 property at either 91.5% or 93%.
Loan at $297,500
(91.5% LVR)
LMI = $6,397
Loan at $302,500
(93.1% LVR)
LMI = $9,259
In this example, borrowing just $5,000 more would increase your LMI premium by almost $2,900.
2. Mortgage Insurers have their own policy
If a loan is in LMI territory, it is likely that your lender will also have to seek mortgage insurer approval. This means that they have the final say. Even if the lender says yes, the mortgage insurer could say no.
It also means that just by changing lender, you could still get the same answer.
3. Not all LMI is the same
There are three insurers in Australia and some of the big banks also self-insure. They all have their own policy and they all charge their own rates. This means a difference of potentially thousands between lenders and insurers.
LMI has had a profoundly positive impact in Australian property. For the economy LMI is another layer of protection for our banking system and for consumers a method of being able to borrow greater than 80% of the value of a property.
Pro tip: get advice upfront on which lender/insurer is best for you and check your thresholds.