Lenders Mortgage Insurance, or LMI, is insurance for lenders.
Lenders hedge their bets on all loans by using third-party insurance companies. Low deposit, riskier loans attract a higher premium for lenders which they pass onto the borrower.
As an example:
If the borrower comes into financial hardship for whatever reason and cannot meet their mortgage repayments, if there is no other resolution found, the property may need to be sold to cover the outstanding loan amount. In these situations, the property could potentially sell for less than the outstanding amount owing. This is where the LMI insurer may pay the lender the gap amount owing in accordance with the LMI policy, and potentially seek to recoup the amount they had to pay from the borrower directly.
Who pays for LMI?
The borrower – when the 20% deposit cannot be provided when purchasing the property.
Otherwise, the lender.
Who does it cover?
LMI should not be confused with Mortgage Protection Insurance which is an insurance option to cover your mortgage and/or your mortgage repayments in the event of death, disability, unemployment or reduced income.
When is LMI required?
If you do not have the minimum 20% deposit against your property value, you will be required to pay LMI.
This deposit does not include other additional costs associated with the purchase such as stamp duty, solicitor fees, etc. Some lenders also have policies for newly constructed apartments in high-density areas, requiring a minimum 30% deposit.
What is the benefit of LMI?
For borrowers, LMI grants the ability to apply for a home loan without having to save up for the entire 20% deposit, allowing borrowers to enter the market sooner or secure their dream house.
For lenders, LMI reduces the risk when providing a high LVR home loan.
LMI especially benefits borrowers who have high income and lower savings since they can service the LMI premium.
LVR = Loan to Value Ratio. Loan Amount divided by the Property Value represented as a percentage.
How is LMI paid?
The LMI premium is a one-off fee and can be:
Included in upfront costs as a lump sum and paid immediately
Added to the borrowed amount (mortgage) and paid off monthly.
This second option is referred to as ‘capitalising‘ the LMI premium and will increase your overall borrowed amount.
Although this means that the borrower can now pay off the LMI over 30 years, the premium will also be affected by the interest rate related to the loan.
Note: Borrowers pay the premium to the lender and not the insurance company.
What is the cost of LMI?
LMI is calculated using an LMI Rate which will vary depending on:
Lenders have different LMI Rates. Some lenders use third-party insurance companies, most notably Genworth and QBE, or an inhouse insurance facility.
The LMI Rate is not to be confused with the loan’s interest rate.
Several other factors also affect the LMI Rate depending on the lender including:
loanFirst Home Buyer
The state’s Stamp Duty rate on LMI
See the case study below to better understand the approximate cost.
$700,000 Property Value
$625,000 Loan Amount, $75,000 Deposit (11%)
High documentation, Non First Home Buyer, NSW, 30 Year Loan Term
LMI Rate = 2.71% (calculated using Genworth’s LMI premium estimator)
This loan attracts an LMI premium of ~$17,000.
If the borrower opts to capitalise the LMI premium with a loan interest rate of 4.00%, the LMI works out to be ~$81 per month over the 30 year loan term.
Does it matter which lender I go with?
Because each lender has different policies surrounding LMI, it can be crucial to choose the right lender.
Each lender and their home loan products have policies regarding:
When LMI is required
What LMI rate is used
The criteria for eligibility
For example, some Citi products will not charge LMI premiums for home loans with deposits as low as 15% (85% LVR).
For the above Case Study, if the LMI premium is capitalised, the loan amount will increase and hence, the LVR increases from 89% to 92%. Some lenders will view the borrower’s serviceability before including LMI.
This means that if two lenders offer a product that allows up to 90% LVR, one lender could deny the borrower (once the LVR becomes 92%) while another may only evaluate the situation based upon the initial 89%.
A Mortgage Broker can provide information on these different policies and know which lenders are most suitable for your loan.
Can the borrower be exempt from LMI?
LMI can potentially be waived for certain professions (for loans up to 90% LVR). Not all lenders deleted apostrophe carry this profession exemption policy and the ones that do differ on what professions are applicable.
These professions may include (but are not limited to):
Does LMI delay the application process?
Qualifying for LMI means that the borrower needs to satisfy both the lender’s lending criteria and the insurance company’s qualifying guidelines.
As there is another layer of approval, this will delay the formal approval process.
Can LMI be refunded if I pay off my loan early?
Since the changes to LMI in 2012, refunds on premiums are typically not possible. However, there are still a few lenders who may provide a partial refund under strict criteria depending on the lender.
What happens if I cannot pay off my loan?
Paying an LMI premium does not absolve borrowers from liability of the home loan and borrowers are still subject to pay the mortgage shortfall.
For further advice about Lenders Mortgage Insurance please get in touch with us.
JM Financial Solutions
0415 419 442