What is LMI? Who does it protect? How can you avoid or minimise it?
LENDERS MORTGAGE INSURANCE (LMI)
Lender’s Mortgage Insurance (LMI) protects the lender from financial loss in the event that the borrower can’t afford to keep up their home loan repayments. The crazy thing is, unlike other forms of insurance, the borrower must pay for it plus the insurer will still hold them liable for any claims paid out. If you have a 20% deposit you are generally exempt from LMI, however, if you are borrowing more than an 80% loan-to-value ratio (LVR) most lenders will require you to pay for their LMI when establishing a loan.
What factors determine the cost of LMI?
The size of the loan
The amount of deposit you have (i.e. the higher your LVR is above 80% the higher the premium)
Property purpose i.e. investment or owner occupied
Insurer (the two main insurers are QBE and Genworth but some non-bank lenders also self-insure)
How to avoid paying LMI?
Save a larger deposit - a bigger deposit means a smaller loan amount and a decreased LVR = less or no LMI.
Use a family guarantee - if you don’t have the financial capacity to save a 20% deposit but still want to avoid LMI, you may consider getting a guarantor on your loan. Normally a close relative, guarantors can use the equity in their property to help you secure yours.
Take advantage of professional benefits - predominately targeted at medical professionals (however accountants, lawyers and engineers may also qualify) some lenders consider professionals earning a minimum of $150,000 a year as ‘low risk’ borrowers due to the perceived stability and high income, and don't require them to pay LMI up to a 90% LVR.
Speak to us about your situation. We can advise whether or not you will have to pay LMI and estimate your premium.