Buying a home is exciting—until you start looking at the costs beyond the sticker price. One of the nastiest surprises for first-time buyers can be Lenders Mortgage Insurance (LMI). Designed to protect lenders when you have less than a 20% deposit, LMI can add thousands to your loan, making home ownership feel even further out of reach.
But before you resign yourself to paying up, take a deep breath. There are a few tricks to reduce, or even avoid, LMI altogether. In this guide, we’ll cover what LMI is, how much it can cost, and—most importantly—how to save on it without jumping through a million hoops.
Understanding Lenders Mortgage Insurance
What is Lenders Mortgage Insurance?
In a nutshell, Lenders Mortgage Insurance is a one-off premium you pay if your deposit is less than 20% of the property’s value. It protects the lender—not you—if you default on your home loan. It’s often confused with mortgage protection insurance, which covers your repayments if you lose your job or fall ill.
The kicker? LMI can cost you thousands, and it’s usually added to your loan amount, meaning you’ll pay interest on it for the life of the loan. Not exactly a bargain.
How does LMI work?
If you’re borrowing more than 80% of the property’s value, most lenders will require LMI to offset the risk. The premium is either paid upfront or capitalised into your loan (which means you’ll pay interest on it).
It’s worth noting that the cost of LMI isn’t fixed—it varies based on factors like your deposit size, the loan amount, and your lender’s policy.
Cost of Lenders Mortgage Insurance
How much is Lenders Mortgage Insurance?
The cost of LMI depends on a few key factors:
- Loan-to-Value Ratio (LVR): The higher the LVR, the higher the LMI cost. For example, an LVR of 95% could see you paying twice as much in LMI compared to an LVR of 85%.
- Loan Amount: The more you borrow, the higher the LMI premium.
- Your Deposit: A 15% deposit instead of 10% can significantly reduce the LMI cost.
For a rough idea, LMI can range from around $5,000 to over $20,000 depending on the loan size and LVR. If you want to skip the guesswork, a lenders mortgage insurance calculator can give you a more accurate estimate.
Factors Affecting LMI Costs
- Employment Type: Self-employed borrowers often face higher LMI premiums.
- Credit Score: A higher credit score can sometimes reduce LMI costs.
- Property Type: Investment properties can attract higher LMI premiums compared to owner-occupied homes.
Utilizing Lenders Mortgage Insurance Calculator
How to Use the Calculator
Using a lenders mortgage insurance calculator is straightforward. You’ll need to input:
- Property Value: How much the home is worth.
- Deposit Amount: How much you’re putting down.
- Loan Amount: The difference between the property value and your deposit.
The calculator will then give you an estimate of your LMI premium. Many lenders, including Wealthy You, offer free LMI calculators on their websites.
Interpreting the Results
If the LMI premium makes your eyes water, don’t panic. Use the results to explore different scenarios—like increasing your deposit slightly or adjusting your loan amount—to see how much you could save. Even a small deposit boost can make a noticeable difference.
Strategies for Reducing LMI Costs
Increase Your Deposit
This one’s a no-brainer. Boosting your deposit to 20% wipes out LMI entirely, but even a smaller increase can reduce your premium significantly. If saving a bigger deposit feels impossible, consider using a parental gift or even a guarantor loan.
Improve Your Credit Score
A solid credit score doesn’t just help with getting approved—it can also reduce LMI costs. Pay down credit card balances, avoid new credit applications, and make sure all bills are paid on time.
Shop Around for Lenders
Not all lenders charge the same for LMI. Some lenders offer LMI waivers for professionals like doctors, accountants, and lawyers, even with a deposit as low as 10%. Comparing different lenders’ policies can save you thousands in LMI premiums.
Consider a Guarantor Loan
If you’ve got a generous parent willing to act as a guarantor, you can sidestep LMI completely. The guarantor’s property is used as additional security, which lowers the lender’s risk. Just make sure both you and your guarantor understand the risks involved.
Refinance to Eliminate LMI
If you had to pay LMI when you first bought but now have more than 20% equity, refinancing can eliminate LMI from your loan. It’s worth running the numbers to see if the savings outweigh the refinancing costs.
Cutting the Cost of LMI Without Cutting Corners
LMI might seem like an unavoidable cost if you don’t have a 20% deposit, but with a bit of planning and strategy, you can either reduce it significantly or avoid it altogether. From saving a bigger deposit to using a guarantor or finding a lender with more flexible policies, there are options out there—no matter your financial situation.
If you’re keen to explore your options, Wealthy You offers advice and loan options to help you get into your new home sooner—without the LMI sting.
FAQs
Can you avoid Lenders Mortgage Insurance without a 20% deposit?
Yes. Some lenders offer LMI waivers for certain professions, or you can use a guarantor to bypass it.
How much is Lenders Mortgage Insurance on average?
LMI can range from around $5,000 to over $20,000 depending on your loan amount and deposit size. Using a lenders mortgage insurance calculator can help you get a more accurate figure.
Is Lenders Mortgage Insurance refundable?
In most cases, no. However, if you refinance or pay off the loan very early, some lenders might offer a partial refund.
Can LMI be added to your loan?
Yes. Most lenders allow you to capitalise LMI, which means adding it to your loan amount. The downside is you’ll pay interest on it for the life of the loan.
Does LMI protect the borrower?
No, lender mortgage insurance protects the lender—not you. If you default, the lender claims the insurance to recover their loss.
If you have any questions or need further assistance, please contact us.
info@wealthyyou.com.au
☎️ (02) 7900 3288
