For many Australians, buying a home is one of the most significant financial steps they’ll ever take. But if you don’t have a 20% deposit saved, you might encounter something called Lenders Mortgage Insurance (LMI).
So, what is LMI, and how does it work? Let’s break it down to give you a clear understanding.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender (not you, the borrower) if you default on your home loan.
It’s required when your loan-to-value ratio (LVR) exceeds 80%, meaning you’re borrowing more than 80% of the property’s value.
LMI helps lenders mitigate the risk of lending to borrowers with smaller deposits, making it possible for more people to enter the property market.
How does Lenders Mortgage Insurance work?
Here’s how it works in practice:
- Who pays for LMI? While LMI protects the lender, the borrower pays for it upfront or includes it in their loan repayments.
- How is LMI calculated? The cost of LMI depends on:
- The size of your loan
- The LVR (how much deposit you have)
- The lender’s specific rates
For example: On a $500,000 property with a 10% deposit, the LMI premium could range from $5,000 to $15,000, depending on the lender and insurer.
- One-off cost or added to your loan? You can choose to pay LMI as a one-off expense or capitalize it (add it to your loan). Keep in mind that capitalizing increases your loan balance and the interest you’ll pay over time.
Why is LMI important?
LMI enables lenders to approve loans for borrowers who don’t meet the 20% deposit threshold.
It has opened doors for many Australians who might otherwise struggle to save a large deposit, especially first-home buyers.
Benefits of LMI:
- Get into the market sooner: You can buy a home with as little as a 5% deposit.
- Build equity faster: Entering the market earlier means you can start building equity sooner.
- Broader access to loans: Lenders are more willing to approve high-LVR loans thanks to LMI.
Is LMI tax deductible?
For most homeowners, LMI is not tax-deductible.
However, if you’re buying an investment property, you may be able to claim the LMI cost as a deduction over a five-year period.
So, be sure to consult with a tax professional to determine whether this applies to your situation.
How does LMI compare to other costs?
LMI is one of many upfront costs associated with buying a property. Here’s how it stacks up:
- Deposit: A 10% deposit on a $500,000 property is $50,000.
- Stamp duty: This depends on your state but can range from $10,000 to $20,000 (with concessions for first-home buyers).
- LMI premium: Adding $5,000–$15,000 to your costs, depending on your deposit size.
Understanding these costs can help you plan your finances more effectively and make informed decisions.
Also Read: How to avoid LMI
Tips to manage or reduce LMI costs
If you’re likely to pay LMI, here are some ways to manage or minimize it:
- Save a larger deposit: Increasing your deposit even slightly can lower your LMI premium.
- Use a guarantor: A family member can secure part of your loan to eliminate the need for LMI.
- Check for government schemes: Programs like the First Home Guarantee allow eligible buyers to purchase with a 5% deposit and no LMI.
- Shop around: Different lenders and insurers offer varying LMI rates.
Also read: How to take advantage of LMI exemptions
Common questions about LMI
Q: Can LMI be avoided?
A: Yes. Borrowers with a 20% deposit or more don’t need to pay LMI. Other strategies include using a guarantor or accessing a government scheme like the First Home Guarantee.
Q: Does every lender require LMI for high-LVR loans?
A: Most lenders do, but some offer alternatives for high-LVR borrowers.
Q: Is there a difference between LMI and mortgage protection insurance?
A: Yes. LMI protects the lender, while mortgage protection insurance is optional and protects you, the borrower, in case you can’t make repayments.
Also read: LMI waivers for medical professionals
How a mortgage broker can help reduce your LMI and borrowing costs
Navigating the complexities of LMI and other home-buying costs can be overwhelming, but this is where a mortgage broker comes in.
At Broker360, we have access to over 40 lenders, allowing us to find loan options tailored to your needs, including those with lower interest rates and better terms.
If you’re looking to minimize your LMI or even eliminate it altogether, we can guide you through strategies like government schemes, guarantor options, or refinancing your existing loan to save money.
So, get in touch with us for an initial free consultation on how we can help you.
