LMI: What Is Lenders Mortgage Insurance & How To Avoid It

Lenders Mortgage Insurance (LMI) is a type of insurance in the home loan market. It insures the lender in case a borrower fails to repay their home loan.

The journey of getting a home loan is both exciting and daunting. And one of the many things that make it an unpleasant experience is LMI.

We know it’s an insurance policy for the lenders. But that’s just the surface of it and there are a lot of things that borrowers need to be aware of if you want to make the best possibile decisions.

If you’re looking to learn everything about LMI in mortgage, this guide is your treasure trove of information. We’ll go deeper into what LMI is, why it’s required, how to calculate it, and more.

What Is Lenders Mortgage Insurance (LMI)?

LMI is an insurance policy made to protect lenders when borrowers are unable to pay their mortgage repayments. The insurance company insures the lender when a borrower fails to repay and their property is ultimately sold. 

The amount insured is any amount that remains in the mortgage after the property is sold. This is called a Shortfall debt—the total amount of debt remaining after the property is sold.

Here’s an example to put this into perspective:

• Let’s say you took a $600,000 mortgage. 

• You paid off $10,000 in the first few months but failed to make any further repayments.

• The bank decides to sell out your property and it gets sold for $500,000.

• The lender gets the remaining $90,000 of the mortgage insured by LMI.

However, even though the lender is ultimately protected in the worst-case scenario, the borrower is still liable to pay back the shortfall debt, this time to the insurance company rather than the lender.

Who Pays for LMI?

Even though LMI is designed to protect the lenders, it is the borrowers who are required to pay the premium. 

Depending on your lender, this premium may be deducted from your total loan amount or could be added to the loan, which slightly increases the amount but allows you to pay it off over time.

When Is LMI Required?

Typically, LMI is required when the borrower has a deposit amount less than 20%.

There are also other common scenarios where LMI is applicable, mainly when the borrower is a first-time borrower or a high-risk borrower.

So, What Happens if I Fail To Repay My Mortgage?

When you fail to repay your mortgage, your house will be sold by the lender. In case the selling price of the house is lower than the outstanding loan balance (shortfall debt), the lender would claim their LMI.

Once claimed, the insurer will pay the lender the shortfall amount. However, you are still required to pay back the shortfall debt, although to the insurer this time rather than the lender.

Why Lenders Mortgage Insurance Exists

Remember that LMI is required when you have a deposit amount of less than 20%? That’s the major reason why Lenders Mortgage Insurance exists; to protect lenders from the risk associated with high loan-to-value (LVR) loans.

But ultimately, it also entirely depends on your lender. They can waive LMI for you based on certain conditions, so if you’re looking to avoid paying it (more on that below), you might want to vet your options of lenders.

We’re the #1 mortgage broker in Australia with hundreds of loan offers and lenders that would be beneficial to you. If you share your unique requirements, we’ll work with you to find the best home loans on the market for you, allowing you to choose whatever works best for you.

Just get in touch with us and we’ll take it from there.

How to Calculate Mortgage Lenders Insurance

The cost of LMI varies based on a number of factors, including the loan amount, the size of the deposit, and the LVR. 

Most lenders usually charge 1-5% of the loan amount as LMI. Taking that into account, here’s how much LMI you’d be paying on a $540,000 home loan: LMI = $5,400 - $27,000.

Factors That Influence LMI

The cost of LMI depends on a lot of factors, including:

• Loan-to-Value Ratio (LVR): The higher the LVR, the higher the LMI premium.

• Loan Size: Larger loans typically incur a higher LMI premium.

• Type of Lender: Different lenders may charge varying LMI premiums, depending on their risk appetite.

Usually, for most lenders in Australia, it is around 1-5% of your loan amount.

Lenders Mortgage Insurance Exemption: Can You Avoid Paying LMI?

Yes, you can avoid paying LMI, and there are multiple ways to go about it.

The first option is to get your loan with a larger deposit of 20%. The major reason why LMI exists is the lower deposit amount, so if you can put up a larger deposit, you’ll be waived off the Lenders Mortgage Insurance.

Your second option is to use a Guarantor. A guarantor is basically a safety net for the borrowers—they offer part of their home equity to increase your chances of getting a loan.

If you have this additional security of a Guarantor, your lender way waive off LMI for you.

Another option is to use the benefits of your profession. For instance, some lenders provide LMI waivers for teachers in Australia. Check with your lender to see if that’s an option you have.

The Pros and Cons of LMI

Pros of Lenders Mortgage Insurance:

• Allows access to home ownership with a lower deposit.

• Enables buyers to enter the market earlier, potentially benefiting from property appreciation.

Cons of Lenders Mortgage Insurance:

• Adds extra cost to the home loan.

• Does not protect the borrower, only the lender.

Conclusion

That sums up everything about LMI. It’s an insurance in the home loan market designed to protect the lender in case the borrower fails to repay their home loan.

It’s important to know about LMI because it literally adds thousands of dollars to your already hefty home loan. However, you also have the golden opportunity to avoid paying LMI by bringing in a larger deposit, using a guarantor, etc.

At the end of the day, the right lender would be willing to work with you to offer you the best value loan on the table. And being the best qualified mortgage broker in Australia, we’ll bring you more than one lender for you to choose from—lenders that are ideal for your unique requirements. 

If you’re looking for a home loan, get in touch with us today and get access to hundreds of home loan offers and lenders that would be the best for you!

Compare rates from multiple lenders

Let our home loan experts secure the most suitable deal for you