When you need to borrow more than 80% of the value of the property that you want to buy, lenders will usually require you to pay Lender’s Mortgage Insurance (LMI) as a condition of the home loan contract.
This means you can actually purchase your own home without having a full 20% deposit. The LMI premium makes up the security for the loan that would otherwise be provided by the equity purchased with your deposit.
Lender’s Mortgage Insurance protects the lender by covering your mortgage in case you default on your home loan. It’s not the same as Mortgage Protection Insurance (or Income Protection Insurance), which covers your mortgage payments if you are sick, unemployed, suffer disability or death.
The purpose of LMI is to cover any loss by the lender in case they do not recover the outstanding balance of your loan in the event of a default and sale of the property.
You will need to pay LMI when your deposit is less than 20% of the purchase price of the property you are buying.
The insurance premium is either paid up front as a lump sum premium, or added to the total value of the mortgage, and repaid with your monthly repayments.
The lender is the insured party, not you, the borrower, or any guarantor. If you do default on your mortgage repayments and a claim for loss is paid to the lender, the insurer may seek to recover any shortfall in the amount paid from you or from any guarantor.
Your LMI is calculated as a percentage of your loan amount, and will depend on both the amount borrowed and your Loan to Value Ratio.
To determine if you will need to pay LMI you must have a Loan to Value Ratio (LVR) of 0.8 or less. Your LVR is :
Loan amount - Deposit amount = LVR
As you can tell from this ratio, the amount of LMI that you pay will depend on how much equity you hold in your property.
Your mortgage broker or your lender will make the arrangements for the Lender's mortgage insurance that you may need, including the documentation . If you have any questions about this process, ask your mortgage broker, and they will explain everything to you.
Some lenders will allow you to add the cost of the LMI premium to your mortgage. This will increase your repayments a little, but it means that you don't have to find the money upfront.
You also have the option to pay the full premium as part of the fees of setting up the home loan.
If you're LVR is only slightly over 80%, your LMI may be waived if you meet some specific conditions.
For applicants in certain professions, LMI might be waived for LVR’s up to 90%. This will be assessed on an individual basis. If you are in one of the following professions, speak to a mortgage broker to find out what your options may be:
You’ll need to show membership of the specific association for your profession.
Some lenders offer an alternative to Lender's Mortgage Insurance. Instead of using a third party insurer, they will charge you a one-off risk fee.
The fee is usually less than LMI would be. It does not attract stamp duty or insurance taxes as it is not an insurance cover.
A risk fee may also apply to non-traditional loans, such as if a borrower has past credit issues. In some cases, it's a condition of the loan regardless of your LVR.
If you repay the mortgage within the first 2 years, sometimes a partial refund might be available. Generally, this would not be the case, it depends on the lender that you choose and the structures they have in place.
There are two ways you can avoid needing to pay the Lender's mortgage insurance premium. You can save up a deposit of 20% of the purchase price of the property you are going to buy, or you can buy using a family guarantor. The guarantor will pledge the equity that they have in the property they already own as the security for your new property, taking the place of a large deposit.
This is a question that depends on what you want to do, and what your situation is right now. There isn't a blanket answer for everyone.
To work out what your options are, and to get the information you need to make a well-informed choice, it is best to speak to a mortgage broker. Your broker will explore your options with you and give you a clear picture of the paths you can choose moving forwards.
If you decide to take out a home loan with Lender's mortgage insurance attached, there are two key ways this will affect your mortgage:
Stamp duty and GST are payable on Lender's mortgage insurance. These are usually included in the total price quoted for the premium to be paid at the beginning of your mortgage.
If your Loan to Value ratio for the property you are refinancing, or the new property you are purchasing is high risk - this usually means it is over 80%.
If you are buying another property, you may be able to use the equity that you have in the home you already own as security for the new mortgage. Check with your mortgage broker about what options are available to you - if your current property has increased in value this will increase your equity on top of the increase from the regular mortgage payments you've been making.
Lender's Mortgage Insurance protects the lender from loss in the event that a mortgage doesn't get repaid in full to them. It doesn't protect the individual with the mortgage from potentially losing their home if they can't meet the repayments.
Mortgage Protection Insurance is a form of insurance that protects you, and your new home if you are unable to meet your mortgage repayments for any reason. It means in a situation where you are out of work, injured, or some other unexpected calamity occurs, you won't lose your home.
There are a variety of types of cover you can choose from, depending on your personal situation. You can ask your mortgage broker about what the options are when you apply for a home loan pre-approval, or at any stage during the life of your mortgage.
Types of cover that you can consider include:
Having the right kind of insurance cover as your personal circumstances change is essential to ensure you protect your investments and your family.
If something happens and you can't meet your monthly mortgage repayments, hopefully, you'll have income protection insurance or mortgage protection insurance in place to cover for you.
If you're looking at getting a home loan, you should definitely consider some form of insurance to protect your investment if anything unexpected should happen. Your mortgage broker can refer you to a wealth management professional who can give you some choices.
If you do have these protections in place, it's still a good idea to talk to your mortgage broker about what your options might be.
If you don't have a safety net, the first thing you should do is talk to your lender and to your mortgage broker about what your options are.