While searching for home loans, it’s likely you come across the term Lender's Mortgage Insurance (LMI). You may be wondering what it means and how it will affect you as you search for loans and properties.
LMI is a one-off payment you have to stump up if you borrow over 80 per cent of the property's value - aka a deposit less than 20 per cent. However, LMI only protects the bank, not you. Essentially, if you default on the repayment of your loan and the lender sells the property to recover the amount but there is still a shortfall, this insurance covers the difference for the lender.
How much does mortgage insurance cost?
The LMI you will have to pay depends on the amount borrowed, the lender, and the deposit size, but is usually a significant amount.
Often, Australian borrowers will spend several thousand dollars on LMI, but it’s worth speaking to lenders for a more accurate estimate based on your circumstances. Generally speaking, the lower your deposit, the higher your LMI.
What happens if you refinance the loan?
You have to pay LMI to your initial lender and it cannot be transferred if you change lenders. So refinancing your loan to a different home loan is not one of the ways to avoid mortgage insurance. When you refinance, you’re essentially borrowing a brand new home loan on your property, usually for the remainder amount that you owe.
In simple terms, if you desire to refinance your current home and still borrow over 80 per cent home loan of property value, you’ll probably need to pay LMI again. So, do speak with your lender and calculate whether this is worth the move or not before you refinance.
How can I avoid Lender's Mortgage Insurance?
Here are some ways to avoid mortgage insurance.
- Save more to pay the 20 per cent deposit
While it can be a big ask in expensive Australian cities, saving a deposit of 20 per cent or more is one way to avoid LMI.
- Consider a guarantor
Guarantors provide their personal properties as additional security to your home loan. This means that if you default, the lender can repossess the guarantor’s property.
- Check if your profession can help you save on LMI
Certain professionals such as lawyers, accountants, doctors, and others are sometimes eligible to borrow more than 90 per cent of their property value without needing to pay LMI. These professions include
- Mining engineers