What is LMI (Lenders Mortgage Insurance)?

There are many reasons why saving a 20 per cent deposit can be difficult – the current cost of living, you’re buying as a single, you’ve got a few extra mouths to feed, or you haven’t walked past an End of season sale sign since 2007.

But there is another way many people can purchase their dream home each year without having 20 per cent deposit or help from rich parents – Lenders Mortgage Insurance (LMI).

How does LMI work?

LMI is a fee paid by the borrower (in this case, you) to protect the lender (the institution giving you the money) against any potential loss if you can’t repay your home loan.

The amount varies depending on the lender, it can be paid upfront as a one-off fee or built into your home loan repayments.

How is LMI calculated?

If your deposit is less than 20 per cent of the property’s value, it means your Loan to Value Ratio (LVR) is more than 80 per cent. Borrowers with an LVR of more than 80 per cent are usually required to pay LMI, because it’s considered to be a higher risk for the lender.

Your LVR is a simple calculation of how much you need to borrow, against the value of the property.
Take Ed, he’s dreaming of a $750,000 apartment in Prahran, and has saved the 10 per cent deposit of $75,000.

This means Ed will need to borrow the other 90 per cent of the property value, or $675,000, from his bank. This is also known as his LVR.

LMI vs extra savings?

LMI

Since the late 1980s, LMI has given millions of Australians a footing in the property market when ordinarily, they wouldn’t have been given the opportunity.

Let’s say you are going for a property that’s $800,000, but you only have 5 per cent ($40,000), 10 per cent ($80,000) or 15 per cent ($120,000) of the deposit instead of the standard 20 per cent ($160,000).

For an $800,000 property, your LMI will cost:

• 5% deposit = around $40,000 LMI
• 10% deposit = around $14,000 LMI
• 15% deposit = around $6,800 LMI

If you can’t afford the 20 per cent deposit but can afford the LMI as a one-off (or add it to your loan) without scrambling your finances, it could be your ticket in.

Or perhaps you have the 20 per cent deposit but using it all would leave you completely skint with no safety net. Instead, you might decide to save some of that hard-saved cash for holidays, renovations, or furniture shopping for the new digs.

Extra savings

LMI is an additional cost – and it can add up over the long run. If saving the 20 per cent deposit is an option, and you have the time to save that extra cash, then LMI could be one less hurdle to jump in the race to buying a home.

In summary:

• LMI can be an ideal option for those who can’t save a 20 per cent deposit.
• LMI protects the lender, not the borrower, if there’s a default on the home loan.
• It can be paid as a lump sum or over the course of the loan.

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