Because Lender’s Mortgage Insurance (LMI) can be a significant extra expense when purchasing a property, it’s important to include it in your budget when calculating whether you can afford a home loan, to avoid finding yourself in financial stress at the very start of a 30-year mortgage term.
What is Lender’s Mortgage Insurance?
If you can only afford a small deposit on a home loan (e.g. less than 20% of the property value), your lender may take out insurance that covers their risk in case you default on your repayments.
While LMI only covers your lender, and not you, many lenders will pass on the cost of the LMI premium to the borrower applying for the home loan – that’s you.
Low-deposit home loans are also known as high Loan to Value Ratio (LVR) loans – mortgages with deposits of 10% or 5% have LVRs of 90% and 95% respectively.
How much does LMI cost?
The cost of LMI tends to be measured in thousands of dollars, though the exact cost can vary, as just like many other insurance premiums, it is based on a range of factors, including:
- Your lender
- Their insurer – Genworth and QBE are two major LMI providers, though there are others
- The size of your deposit
- The value of the property you’re buying
- The term of your mortgage
- If you’ll live in the property – some insurers consider owner occupiers to be less risky than investors
- Your employment status
- Whether you have savings
- If you’re a first home buyer
…and many more.
Depending on the value of the property you’re buying, the total cost of deposit plus LMI can often end up less than paying a full deposit, but LMI is still a significant expense that you’ll need to take into account when saving to buy a house.
How can I get an LMI estimate?
Using the RateCity LMI Calculator, you can get a guideline of how much you can expect to pay in LMI for a home loan of a particular size.
For example, if you’re looking at a property valued at $500,000, and you apply for a 90% loan, you’ll borrow $450,000 and pay a 10% deposit of $50,000.
In this case, the cost of your LMI will likely be in the area of $8775, depending on the precise circumstances. This would mean you’d need to have saved around $58,775 to apply for this home loan.
If you opted for a 95% loan of $475,000 for the same property, paying a 5% deposit of $25,000, the LMI cost may be around $16,245. This would mean you’d need to save around $41,245 to apply for this loan.
Do I have to pay LMI?
If you doubt you’ll be able to easily afford both a house deposit and LMI, one possible option to reduce your upfront home loan costs is to get a guarantor.
Some lenders will allow a parent of family member to act as a guarantor on your home loan, effectively using the equity in their own home as security for your loan.
Some lenders will allow you to add the cost of LMI to your home loan, and pay it back over time. Going down this path does mean paying interest on the LMI costs, which could ultimately cost you more in total over the long term.