Realizing the dream of homeownership is the most thrilling and satisfying moment in someone's life.
It can also be challenging because of the time it takes to save up to 20% of the home loan deposit that most banks ask for before handing out a mortgage.
If you find saving the minimum required deposit tough, you might still obtain a loan with a lender's mortgage insurance (LMI). Learn what LMI is and how it can help get you on the property ladder faster to buy your dream home.
1. What Is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a standard insurance that protects a lender if the borrower fails to pay the outstanding loan balance.
It is non-refundable and non-transferrable insurance whose premium is calculated based on the deposit and borrowed amount. The larger the house deposit is, the lower the premium payments are. This insurance is added to the home loan when you take a loan from a lender.
2. When Is LMI Applicable?
LMI is usually applicable when the lending firms such as banks and credit unions perceive a higher associated risk with the loan. A borrower may need mortgage insurance if he borrows over 80% of the home's "lender's assessed value".
Taking this insurance helps lenders reduce their financial losses when the borrower defaults on loan repayments if there is a 'shortfall'. (when the sale proceeds are less than the loan owed to the lender).
3. How Does LMI Work?
Mortgage lenders assess borrowers' finances and the mortgage structure to decide whether they can approve the home loan application.
If the deposit is below 20% of the lender-assessed value or the "Loan to Value Ratio" is over 80%, the lender will consider it a higher risk. Borrowers take loan mortgage insurance to safeguard their finances when defaulting on loan repayments.
If the borrower can not repay the home loan, the lender sells the property to recover the outstanding loan amount. Suppose the money received after the house sale is insufficient to pay off the unpaid debt. In that case, the lender will recover the loan from the borrower.
Suppose the borrower doesn't have the money to repay the loan. In that case, the lender recovers it from any guarantor listed on the home loan.
It is important to note that LMI covers only the lender and doesn't cover the home loan's borrower or guarantor.
The borrower has to pay the policy premiums, not the lender. Only the lender can raise a claim under the policy, not the loan borrower.
4. Is Lenders' Mortgage Insurance Worth Considering?
LMI insurance benefits those who want to own a home but can not afford a 20% upfront deposit to get the loan.
However, a few lenders will be willing to take the risk and grant you a loan if you pay for an LMI. With it, a lender can offer you a loan of up to 95% of the buying price of the home's value but will apply an LMI to the loan.
Though LMI is not cheap, paying for LMI with a smaller deposit of 5% or 10% of your home's value can be faster than spending several years saving a large deposit of 20% or above. Thus, the best benefit of LMI is to help borrowers realize their homeownership objectives more quickly.
Stop making rental payments
Grow your money through property investment
Don't depend on any guarantor for added security to secure your home mortgage
From a lender's perspective, LMI helps them prevent losing money when the borrower stops paying his remaining debt. When lowering the risks associated with loan default, lenders become more likely to lend to borrowers, even without an upfront 20% deposit.
The borrower is carrying the loan cost, and paying interest on the insurance over a long period eventually costs them more.
5. How Is LMI Differ From Mortgage Protection Insurance?
Unlike LMI, which covers only the lender, mortgage protection insurance helps the home loan borrower if he can not repay the loan. This can be due to the following reasons: poor health, permanent disablement, death, or loss of employment.
The insurance is intended solely for the borrower. It provides income protection, peace of mind, and confidence that they will not lose their house even if they fail to repay their outstanding debt.
In any of the above events, the insurance either provides a lump sum payment or makes regular monthly home loan repayments.
However, there are a few drawbacks to this insurance:
There is only one payout.
Only a home loan is covered. You will still have to manage your other day-to-day expenses, such as school/tuition fees, living expenses, and other loans from other income sources.
6. How Much Does LMI Cost?
The LMI premium is a one-time and non-refundable fee paid in full when settling the loan. The premium isn't transferable if the borrower refinances his loan.
The average LMI cost depends on the following factors:
The LMI provider
Size of the loan
Type of loan
Whether the property is for residential or investment purposes
If applying for the First Home Owner Grant
Borrower's employment status (self-employed or a PAYG employee)
The percentage of the home value you have borrowed.
The policy premium can even differ based on the source of the contribution, your savings or money received as a gift.
Many financial comparison websites provide LMI cost estimates for borrowers. Lenders mortgage insurance calculator ANZ calculates your estimated LMI cost, considering home loan repayments, deposit, stamp duty, and borrowing power.
7. How To Avoid LMI?
LMI is an expense, and many borrowers prefer to avoid it. There are two ways in which you can avoid paying LMI:
Save up the 20% deposit needed to buy the property.
Alternatively, you can arrange a "family guarantor" for your property loan if you don't have the minimum deposit. He can take the responsibility to pay your outstanding debt if you can not pay it. This way, it can provide extra security to the lender and lower the LVR to 80%, allowing you to avoid LMI.
Also, suppose you are a medical professional, accountant, actuary, media professional, lawyer, and member of specific associations for your occupation. In that case, you are eligible for LMI exemption. Consult an expert mortgage broker whether you qualify for an LMI waiver or discount.
If you don't fall in any of the above categories where you can get a lenders' mortgage insurance waiver, try the below to reduce its cost.
Use the First Home Loan Deposit Scheme to purchase a property with only a 5% deposit without paying for LMI. However, the scheme's eligibility depends on your income and the value allocation of the property.
Some lenders may offer an LMI exemption for employees with employment history and high salaries who work in specific industries such as health care, law, entertainment, etc.
Look for properties in affordable areas where you can stretch your deposit or save money to build a larger deposit by living in low-priced co-living accommodation for a year.
Purchase a property as a joint venture with someone you trust. You will contribute the deposit and reduce your financial obligations and LMI.
8. How To Pay The Lender's Mortgage Insurance Premium?
The Lenders' Mortgage Insurance premium is often a one-time fee that your lender might charge you in any of the following ways:
It is added to your loan repayments and paid at the time of loan settlement
It is included in your upfront costs and paid when taking out the loan.
As the premium payment mode varies from one lender to another, you should talk to your lender to find out about it.
9. Is It Possible To Get A Refund If I Pre-Pay My Loan?
Yes, under lenders' mortgage insurance by Westpac, you may get a partial refund of your paid premiums (excluding stamp duty charges) if you meet the following conditions:
If you paid the LMI in full and cleared the linked mortgage:
Within 12 months of the loan settlement date, 40% of the premium will get refunded.
You will receive a 20% loan refund from 12 to 24 months after the loan settlement date.
The debt covered hasn't been in arrears during the entire mortgage duration.
The computed refund is more than the minimum limit.
You must check with your lender if they allow a partial refund and the steps to request a refund.
10. Are LMI Premiums Tax-Deductible?
Yes. Since you are a property investor, your borrowing expenses, including the LMI premiums, are tax-deductible. LMI premiums can't be claimed as one-time lump-sum tax deductions unless the total value exceeds $100 in the year.
It is possible to claim the premium and borrowing costs over the loan term of five years. For example, if you bought a home and your LMI expense is $15,000, you can claim $3,000 per year for over five years.
You might need an accountant's advice to determine the claimable tax deductions.
11. Which Are The Best LMI Insurers In Australia?
Are you looking for the best insurer for LMI? Genworth and QBE are the two largest mortgage insurers that govern the LMI market in Australia.
Genworth Financial operates in more than 25 countries across the globe and has a massive 15 million customer base. It provides LMI services to over 100 lenders in Australia. It has been operating since 1965, and Genworth has insured more than $300 billion of property loans in Australia.
QBE is another globally recognized LMI insurer ranked within the top 25 insurance companies in the global market. It offers various products worldwide, such as car, home, travel, and lenders' mortgage insurance in QLD.
You can also find various smaller LMI providers in Australia that offer LMI services. Some of these include:
Comm Bank (Low Deposit Premium)
12. How Can Lender Mortgage Insurance Calculator Help You?
The West Pac's lender's mortgage insurance calculator is a beneficial tool helping to calculate the LMI insurance cost you must pay to purchase real estate.
Enter the following details to calculate the upfront cost, stamp duty charges, and other borrowing fees associated with a property purchase:
Are you a first-home buyer (Yes/No)?
How much savings do you have at present (in dollars)?
Why do you want to buy a property? (As an investment or to live)
What is the market value of the property (in dollars)?
In which state is the property located?
What type of property are you planning to purchase? Choose from the following options: New construction, empty land to build on, or existing property.
The mortgage insurance calculator checks your eligibility for the "First Home Buyers Grant" in your location. Those buying a house the first time may get an exemption/reduction/concession on stamp-duty charges based on the territory/state where they live.
However, the calculator doesn't provide you with an estimate about the same. Talk to your financial advisor about the applicable waiver or discounts on stamp duty charges.
LMI is a great way to secure a home loan without the minimum loan deposit most traditional lenders require. Before you consider getting LMI, it is worth analyzing your existing funds and using comparison tools to compare the available options.
It can also be helpful to contact a financial adviser for added guidance and read the product disclosure statement before you commit to an insurer.
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