What is Lender’s Mortgage Insurance (LMI)?
Lender’s Mortgage Insurance (LMI) is a non-refundable premium that you pay as a one-off cost on top of your home loan. In fact, your loan amount, deposit amount and property price are contributors to your LMI amount. Therefore, the more deposits you have, the lower your LMI will be. In the past, banks did not lend if borrowers did not have a 20% deposit. This is because banks consider these borrowers as high-risk borrowers. However, now, LMI helps borrowers to buy a property with a smaller deposit. In other words, LMI protects the bank should you default on your loan. As so, at BFG, we work relentlessly to avoid such a huge cost!
- If you borrow more than 80% of your home’s value, LMI is applicable.
- LMI protects the lender or bank you go with – not you as the borrower.
- You don’t need to worry about arranging LMI. Generally, banks will arrange them for you.
- Through LMI waivers or our suggested alternative options, you can save on LMI.
To meet LMI waiver requirements, generally, the relevant lender’s credit team has to review your application. Depending on your particular situation, credit score, property value and other factors will also be taken into account.
What occupations are eligible for an LMI Waiver?
Banks target customer demographics with certain occupations as they present the lowest risk for the highest payoff. They rarely default on their mortgage. They also make repayments on time and borrow at higher amounts than other types of customers.
Occupations that are eligible for LMI waiver:
- Doctors and medical professionals (nurses, psychologists, medical-research scientists and naturopaths are generally excluded)
- Finance professionals and accountants (including auditors and actuaries)
- Lawyers, solicitors and barristers (including judges, government lawyers)
- Professional athletes and entertainment professionals
How to reduce your LMI cost? Tips from our ex-Big 4 bankers
It’s important to understand how banks calculate LMI. There are several factors that affect the cost of LMI, including:
- Your loan amount: the higher the percentage of the loan amount, the higher the LMI will be charged. (For example, home loans less than $300k have much cheaper LMI than those that are $500k+).
- The loan to value ratio (LVR) is the percentage of the property value that you’re borrowing. There’s a significant increase in the premium when you borrow just $1 over 90% or 95%. If you can save a 20% deposit plus upfront cost (stamp duty, conveyancer cost, moving costs, etc…), you can avoid LMI altogether.
- Choosing the bank: Different banks have different LMI insurance providers. The best way is to find a bank that uses a discounted LMI provider.
- Going through a broker: Brokers have a variety of banks/lenders that they work with. If you decide to approach one individual bank; they will offer you only what they have available. To save you time and effort, it is advisable to approach a broker. With thousands of brokers out there it’s important to choose a broker with the right expertise.
Still not sure where to go next? Get in touch! Our experienced team will be able to answer all your questions about LMI.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.
Samuel Philipos is founder and principal mortgage broker at Benevolence Financial Group. Samuel is an ex-banker with over 5 years of experience and is currently being supported by Macquarie University Incubator and City of Parramatta Council