- LMI is protection for your lender, not for you. LMI doesn't cover you if you miss repayments due to illness or job loss. Mortgage protection insurance covers you in these situations.
Lenders mortgage insurance (LMI) can be expensive: If you bought a $600,000 house with a 5% deposit of $30,000 then your LMI premium could cost over $22,000 (based on Finder's LMI estimator).
You can avoid or reduce your LMI costs by saving a larger deposit or using a parental guarantor to cover part of your deposit. Eligible first home buyers can use the First Home Loan Deposit Scheme to avoid LMI completely. And you can also borrow the LMI premium by folding into your loan.
How much is lenders mortgage insurance?
The amount you pay for lenders mortgage insurance depends on the size of your loan and deposit. If you're getting a low deposit home loan, you'll need to estimate your potential LMI costs and factor them into your total home-buying expenses.
Here are some LMI premium estimates made using Finder's LMI calculator. These estimates can give you a quick idea of just how expensive lenders mortgage insurance can be.
Property value | Deposit ($) | Deposit (%) | Estimated LMI cost* |
---|---|---|---|
$600,000 | $30,000 $60,000 $90,000 | 5% 10% 15% | $22,788 $11,772 $5,941 |
$800,000 | $40,000 $80,000 $120,000 | 5% 10% 15% | $34,982 $17,042 $9,064 |
$1,000,000 | $50,000 $100,000 $150,000 | 5% 10% 15% | $43,728 $22,644 $11,959 |
*These costs are estimates only, taken from Finder's LMI premium estimate calculator. These numbers do not reflect genuine LMI quotes from an insurer.
Minimise your LMI costs with a larger deposit
As the examples above show, LMI can add thousands of dollars to the cost of buying a home. The cost of your property and the size of your deposit determine your LMI costs.
If buying the same property, a borrower with a 15% deposit pays less LMI than a borrower with a 5% deposit.
How do I pay my lenders mortgage insurance premium?
Borrowers usually pay LMI during settlement, when your lender provides the funds for your loan and you take possession of the property. This means you can pay your lenders mortgage insurance in a lump sum up front.
But there is another option: You can capitalise the premium, which means you add the premium to your loan. For this to happen, you'll need to borrow your LMI costs along with your loan amount, so that you're paying it off over time.
How does LMI capitalisation work?
- You buy an $800,000 property with a 10% deposit.
- You borrow $720,000.
- Your LMI premium is around $17,000.
- You capitalise the premium into your loan and borrow $737,000.
- Your loan interest rate is 5.50% and your loan term is 30 years.
- Your loan with your LMI premium included adds an extra $96 a month to your home loan repayments.
Finder survey: Do Australians have a good understanding of what's needed for a home loan before applying?
Response | |
---|---|
Yes | 86.58% |
No | 13.42% |
Is LMI compulsory?
LMI is a requirement that banks and lenders have when you save a deposit of less than 20%. The purpose of LMI is to reassure your lender that you are a "safe bet". They want you to take out an LMI policy so they feel reassured that, if you stop making repayments and they have to sell the property, they will recover the full value of their loan.
If you have a 10% deposit, and your property has to be sold by your lender in a forced sale, there's a chance the property could sell for around the same amount of your loan or even less. This could leave your lender "out of pocket" in a forced sale situation.
LMI helps to offset this risk to the lender. If they have to sell your property and you only have 5-10% equity, with an LMI policy in place, they know they will recover all of their loan, even if the property sale doesn't cover it. They will get the full value of the loan repaid by claiming on your LMI policy.
LMI is not compulsory, although it is a firm policy of most lenders. Some lenders will choose to "self-insure", and they may charge you a risk fee instead of LMI. You can avoid paying LMI using some of the strategies listed below.
How to avoid LMI
There are ways to avoid paying LMI, or at least to minimise how much it costs you:
- Use the First Home Guarantee. If you are a first home buyer, the First Home Guarantee may allow you to buy a property with a 5% deposit without paying lenders mortgage insurance. Eligibility for this government scheme depends on where you are buying, your income and the value of the property you are buying.
- Leverage your employment. Some lenders offer LMI waivers to high earners in specific professions even if they don't have 20% deposits. This includes doctors and other medical professionals, accountants, actuaries and solicitors.
- Keep your loan-to-value ratio (LVR) below 80%. If you have a 20% deposit (which is an LVR of 80%), you don't have to pay LMI.
- Take out a family guarantee. A family guarantee or family pledge is when one of your family members guarantees part of your loan with their own property. This way you can borrow money with a low deposit and avoid LMI.
How to reduce the cost of LMI
If you can't avoid LMI completely you can still reduce your costs by:
- Increasing your deposit size. Even if it still comes with LMI, a 15% deposit means a smaller LMI premium than a 5% deposit.
- Buying a cheaper property. Reducing your budget means you can get a bigger deposit relative to the cost of the property.
- Use a first home owners grant to boost your deposit. If eligible, a first home owner grant can form part of your deposit.
LMI pros and cons
Pros
- LMI lets you enter the market faster without spending years saving a big deposit.
- When property prices are rising, entering the market earlier can make buying with LMI cheaper in the long run.
- You can borrow your LMI costs along with your loan, eliminating it as an upfront cost.
Cons
- LMI is an extra home buying cost that can add thousands or tens of thousands of dollars on top of the purchase price.
- Buying with a small deposit means borrowing more money. This means paying more in interest charges.
Can I get a refund on my premiums?
If you're exiting your home loan and have repaid it within 2 years of settlement, it might be possible to get a partial refund, depending on your lender. This option was more common prior to LMI changes in 2012, and it may no longer be possible.
However, it's always worth asking the question as your lender or mortgage insurer may have a unique policy that allows a partial refund.
LMI providers
Many lenders handle LMI with their own insurance products. These have different names depending on the lender. Many other lenders rely on 1 of 2 large lenders mortage insurers: Helia and QBE.
Helia
Helia (formerly Genworth) is an insurer that has offered services to Australian property owners since 1965. Helia was the first LMI insurer in Australia.
QBE
More questions about lenders mortgage insurance
More guides on Finder
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Can I use a personal loan for a house deposit?
Find out if it’s possible to avoid one of the most expensive upfront costs of a home loan with a personal loan.
Ask a question
Please send me a Loan Mortgage Insurance amount for following situation
Purchase price 600,000.00
Bank Valuation 560,000.00
Stamp Duty & other Charges 18,500.00
Loan obtaining from Bank without LMI = 520,000.00
How much the Loan Mortgage insurance
Hi Ranjith,
Thanks for your enquiry.
According to the Genworth LMI estimator, the LMI payable for this loan would be approximately $8 944.00 (excluding stamp duty).
I need to stress that this is an estimate and may not take into account many other factors that could determine your LMI premium.
It would be best for you to speak with your broker directly.
Thanks,
Belinda
I have recently paid out a loan after 8 months which had LMI am i entitled to a reimbursement on the insurance payed
Hi Malcolm,
Thank you for your question.
Generally speaking if you pay off your loan within the first few years you can apply for a refund of the LMI. I would recommend that you contact your lender and LMI insurer to discuss this with them.
Regards
Jodie
Hello guys,
Can you check my figures for me, my bank is confusing me.
I have a home valued at 720,000 and a mortgage on it of 500,000
So 220,000 equity.
I want to buy an investment property of 400,000 including the settlement costs.
The bank should lend 80% of the 400,000 which is 304,000 leaving me to come up with 96,000 .
With 80% of my homes equity I’ll have 175,000 to use . So no need for LMI and I should still have 79,000 in equity after the acquisition?
Any help would be great as my bank is saying I can’t borrow over 300,000 without LMI
cheers
Hi Mark,
Thanks for your question.
Generally speaking, you can borrow up to up to $240,000 (from the $300,000) without incurring LMI.
Given that your equity is $200,000 and you would like to use 100% of that amount, you’ll need to provide $20,000 to make up for this gap.
If these numbers still seem strange to you, it’s best to ask your lender for a breakdown of their calculations, as by law they are required to disclosed all of these. They may also have different policies regarding how LMI is calculated, so it’s best to ask them to explain these to you.
Cheers,
Shirley
HI,
If I take out a loan at 90% and incur the mortgage Insurance and add the amount to the loan, say in 12 months i have incurred enough capital growth for my loan to fall into a 80% LVR. Can the lenders mortgage insurance be cancelled and reimbursed?
Hi Gabrielle,
Thanks for your question. As it is a lump sum you won’t need to cancel it.
I hope this was helpful,
Richard
I have had a broker to assist with my home loan .
The property is $420.000 and i have $45.000 deposit.
I have been told i will be required to pay $12.000 LMI . My loan will be with CBA . Would this LMI calculations be correct ?
Hello Debbie,
thanks for the question.
According to the Genworth LMI estimator, the LMI payable for this type of purchase would cost from $6,600 to $7,350. This is purely an estimator and doesn’t take into account many of the other factors which go into deciding how much LMI is payable, so if you feel this LMI premium is too high it may be a good idea to discuss it with your broker.
I hope this helps,
Marc.