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What is LMI and how much does it cost?

Lenders Mortgage Insurance (LMI) is an insurance policy that covers a mortgage lender against the risk that a borrower may default on their home loan repayments. LMI does NOT cover borrowers – it only protects lenders, such as banks, credit unions and fintechs.

Mortgage lenders typically take out LMI policies when a borrower has less than 20 per cent deposit or equity in a property. This is sometimes called having a Loan to Value Ratio (LVR) of more than 80 per cent.

Most lenders pass the cost of LMI on to the borrower. The less deposit/equity a borrower can provide a lender (or the higher the LVR), higher the cost of LMI may be. LMI can cost anywhere from thousands of dollars to tens of thousands of dollars.

Tip

If you’re a borrower looking for insurance to cover your mortgage payments in the event you’re unable to do so (such as if you suffer long-term illness or injury), you may need to look into taking out a mortgage insurance or income protection insurance policy.

How to use an LMI calculator

To estimate the cost of your LMI, our calculator needs two figures from you: 

  • Your property value: If you’re buying a property, this will typically be the purchase price. If you’re refinancing, it’s the current value of your home, which may have increased or decreased since you first bought it.
  • Your loan amount: How much you plan to borrow to buy the property. For example, if you’re buying a $500,000 property with a 20 per cent deposit ($100,000), your loan amount will be $400,000.

Using these figures, our LMI calculator can estimate the cost of LMI that you’ll need to budget for if you plan to apply for a home loan with a deposit of 15, 10, or 5 per cent of the property value.

Home loan offers with lower minimum deposit requirements are more likely to charge higher interest rates. Compare home loan options and consider your choices before you apply.

How do I pay for LMI?

Using our calculator, you can estimate the cost of LMI when budgeting for your home loan’s upfront costs, which may also include mortgage establishment fees, property inspection fees, and stamp duty. 

Some lenders will let you add the cost of LMI to your home loan, so it can be paid over time as part of your mortgage repayments. This can help remove a significant upfront cost from your home loan, and may only slightly increase your mortgage’s monthly cost. However, this means you’ll be charged interest on your LMI, which could lead to your LMI costing much more over the decades-long term of most home loans than it would if it was paid upfront.

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Frequently asked questions

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.

How do you calculate how much you could save with a lower rate?

To work out how much you could save, we run the home loan details you’ve provided through our database, and search for similar home loan options that we think would be suitable for you.

We then calculate the costs of these loan options over 15 years (to keep our calculations consistent) and compare them to the cost calculations for your current home loan.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.