What is Lender's Mortgage Insurance (LMI)?

LMI is usually required when your Loan to Value Ratio (LVR) is higher than 80% – meaning that you’re borrowing more than 80% of the value of the real estate security.

There’s a common misconception that LMI is for the borrower’s benefit – make no mistake, it’s not for you – it’s only to protect the lender, in the event that you default on your loans and the lender sells the property, but they don’t get enough to fully repay the loan.

(on that note, when you’re getting into a heap of debt, it’s really important that you have adequate personal insurances including Life, TPD (total & permanent disability) and Income Protection – this isn’t something that STAC does, but we do know trusted brokers that specialise in this, ask us today for a referral)

There are some exceptions to the 80% rule, for example:

• “Low Doc” loans (self employed borrowers who don’t have financials available to prove their income) can sometimes require LMI when the LVR is over 60%
• Borrowers of some professions, including medical doctors, lawyers and accountants, can get LMI waivers for LVRs of 85%, 90% and in some cases even as high as 95%.

The cost of LMI can be very little, or very significant – the cost increases almost exponentially as the LVR gets higher, and is a percentage of the loan amount. As an example, if you were to buy a home for $1,000,000, the indicative LMI premium would be:

• $xxxxxx for an LVR of 82% = $820,000 loan
• $xxxxxx for an LVR of 85% = $850,000 loan
• $xxxxxx for an LVR of 89% = $890,000 loan
• $xxxxxx for an LVR of 90% = $900,000 loan
• $xxxxxx for an LVR of 92% = $920,000 loan
• $xxxxxx for an LVR of 95% = $950,000 loan

If you want to get an LMI estimate for your situation, click here to use our calculator. [how do we create/insert an LMI calculator?]

The good thing is that LMI is a one-off premium when the loan is first drawn down, which is either paid out of the loan proceeds, or “capitalised” on top of the loan (in which case you’re borrowing that little bit extra so that you don’t have to fund it from your cash deposit).

The downside to the premium being a once-off upfront cost however, is that – because the insurance can’t be transferred to another lender, or even another loan with the same lender – it can make refinancing to another lender prohibitively expensive until either you’ve paid your loan down enough to no longer require LMI, and/or your property’s value has increased enough to reduce your LVR.

Just to add a little insult to the injury, you technically don’t get a choice as to which mortgage insurance company the lender uses. However, at STAC Home we are able to get the quotes when we are investigating lender and loan options for you, so that us and you are able to make a clear assessment of the total cost of each loan option – including interest rates, total lender fees and the LMI premium.

We and the lender will then also look after all of the paperwork and administration, so that there’s no extra burden on you.

Am I better off waiting to save more of a deposit?

Faced with an insurance premium cost of many thousands of dollars, a lot of people think that’s a huge amount of wasted money and so they’ll hold off buying until they’ve saved more cash. But is that a false economy?

There’s no perfectly right or wrong answer to this question – in our opinion it depends on your personal circumstances, as well as the state of the property market at the time.

Let’s say that the house you want to buy is $1,000,000 today, and it’s in Queensland where the stamp duty would be $xxxx.

If you had $150,000 cash to contribute as a deposit, this would result in a borrowing requirement of $xxxx, plus LMI = total loan amount $xxxx.

If the interest rate at the time were 6%, then your repayments would be $xxxx.

Let’s say you instead decide to hold off buying, so that you can save some more deposit.

To get under an 80% LVR, you would have to save another $xxxx – and let’s say that you have the ability to save that much in the next 12 months.

Meanwhile, let’s say you’re paying rent of $800 per week.

Based upon the rental cost alone, you’re going to pay your landlord $41,600 over the next 12 months, just so that you can avoid the LMI premium of $xxxx. Does that seem wise?

Now here’s the kicker – what if the property market increased while you were saving that extra deposit? Let’s say the market increased that house’s value by 10% in that time.

• If you waited to save the extra, now you’ll have to pay an extra $100,000 for the same house, plus an extra $xxxx in stamp duty. As a result, your $xxxx deposit is no longer enough to get you under 80% LVR – so you’ve chased your tail, so you’ll either have to put off buying even longer, in the hope that values will stop going up whilst you save more again – or you’ll have to bite the bullet and cop what will now be an LMI cost of $xxxx. You spent that “dead money” on paying rent in the meantime – and now because your loan will be higher, your repayments will now be higher too.
• If instead you had have bought in the first instance at $1,000,000 – well now you have a home worth $1,100,000, which therefore means that your LVR has dropped to xxx% – so if you wanted to, you could refinance without having to pay LMI again.

There are downside risks to consider however – reasons why you might be better off waiting:

• If the property market didn’t move at all – and weighing the cost of LMI for your circumstances versus your rent cost over the time it takes you to save the extra cash, meant that you’re better off continuing to rent and save.
• If the property market deteriorated – if you started with a 90% LVR and the value of your home dropped by 10%, you would then have a 100% LVR – you have no equity in the home, you can’t refinance and, if you wanted or had to sell, you would have wiped out all of your deposit (and then would also have to pay the selling agent’s commission too). The media often calls this situation “mortgage prison” – and it can be a very stressful situation to be in.

For these reasons, someone who is living at home with their parents and not paying rent, in a declining property market, probably is better off waiting to save more cash. On the other hand, someone who is paying a lot of rent in the midst of a hot property market, may well be far better off buying straight away and copping the cost of the LMI. 

Summarising all of this, the most important factors you need to consider are:

• How much and how quickly can you save the extra cash?
• How much rent are you paying?
• What might the property market do, in the time it would take for you to save the extra deposit?