Many home buyers taking out a home loan often face two choices: wait until they have saved a 20% deposit or sign on a mortgage with less than the required down payment to get into the market sooner. If you opt for the latter choice though, in most cases you will have to pay lenders mortgage insurance (LMI) before you can secure mortgage finance.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is an insurance policy that protects the mortgage lender against losses they may incur in the event the borrower is unable to repay the loan.
While LMI only covers the lender, the cost is passed on to borrowers who do not meet the required deposit (usually 20% of the property purchase price). Some lenders may waive LMI if you have a 15% deposit or if you're in a select profession, however, the typical trade-off is higher interest rates charged.
LMI is not to be confused with mortgage protection insurance (MPI). Mortgage protection insurance is a type of life insurance that protects the borrower in case they can no longer repay their home loan due to certain circumstances such as unemployment, injury, accident, or death.
How Does LMI Work?
A lender will require you to pay LMI if your loan-to-value ratio (LVR) is higher than 80%. The cost of LMI depends on how much money is borrowed for the home loan. Generally, the higher the LVR, the more LMI you'll have to pay.
LMI can be paid as a lump sum, or it can be baked into the loan and repaid accordingly. In the case of the latter, the extra amount borrowed to cover LMI attracts interest.
In the event of a default, the lender can recover what's owed to them by repossessing and reselling the property the home loan is secured against. If the property's value has fallen, LMI covers the loss the lender incurs.
How Much Does Lenders Mortgage Insurance Cost?
LMI costs at least a couple of thousand dollars, and can easily exceed $10,000 or even $20,000 depending on the loan size and LVR.
Below is a breakdown of LMI costs for a first-home buyer based on a 30-year home loan for various LVRs and property values.
|
Estimated property value |
95% LVR |
90% LVR |
85% LVR |
|
$400,000 |
$15,428 |
$6,552 |
$3,390 |
|
$600,000 |
$31,008 |
$9,828 |
$5,100 |
|
$800,000 |
$41,344 |
$14,400 |
$6,800 |
|
$1,000,000 |
$51,680 |
$20,790 |
$10,115 |
The above figures are a general guide only. Unfortunately, you cannot shop around for a better deal, as you are required to use the LMI chosen by your lender.
The two largest providers of lenders mortgage insurance in Australia are Helia Group (formerly called Genworth) and QBE, and your bank or lender likely only sides with one.
How Does Lenders Mortgage Insurance Get Paid?
You can pay your LMI premium upfront in one lump sum when your home loan settles, however, this is likely to prove quite difficult if you're already cash-strapped and can't save a 20% deposit.
Alternatively, you can capitalise the LMI into the loan and pay it off as part of your regular mortgage repayments. While you won't be hit with a massive one-off cost, it will be far more expensive down the track as the premium will accrue interest. It will also lower your equity further, giving you even less of a buffer if your property's value heads south.
This is why on many home loans you may see that they offer up to 95%, which is in effect up to 98% LVR with LMI factored in. This scenario gives you effectively only a 2-5% buffer.
However, baking it into the loan can be advantageous as you don't relinquish a huge lump sum all at once. You can later refinance once you've hit 20% equity and hopefully recoup some of extra expense associated with baking it into the loan.
How Will LMI Affect My Home Loan?
Right off the bat, LMI increases the overall cost of your loan, affecting long-term affordability in exchange for enabling you to get your foot onto the property ladder sooner even with a smaller deposit.
Increases Your Debt
LMI added to the loan amount effectively increases the overall debt you need to repay. Your monthly repayments will be higher than they would be without LMI and, since it's part of the total loan, it will increase the total interest paid over the life of the mortgage.
Alternatively, paying the premium upfront can potentially save you in interest and keep your monthly repayments lower, though it can be a substantial out-of-pocket expense that eats into your deposit savings.
Gives You Better Chances to Get Loan Approval
By reducing the lender's risk, LMI can make it easier for borrowers to get approved for a loan, even if they have a lower deposit or are considered higher risk (i.e. less-than-ideal credit scores, irregular income).
Aside from enabling first-time buyers with small a deposit saved to purchase their home sooner, lenders are likely more willing to approve loans with higher loan-to-value ratio (LVR) because LMI covers the additional risk.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Disclosure | |||||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% |
| Promoted | Disclosure | ||||||||||
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% |
| Promoted | Disclosure |
Do I Need to Pay LMI When Refinancing a Home Loan?
Unfortunately, LMI is not transferable when you refinance your mortgage with a different lender. This is because your mortgage is terminated when you refinance and you're essentially making a new loan arrangement.
If you have a low amount of equity in the property (you're borrowing more than 80% of the property's value), you'll have to pay LMI again. This is why it's generally recommended to refinance only if you have at least 20% equity.
Some lenders might allow for the existing LMI policy to be transferred or to be waived or reduced if you're refinancing internally, especially if there have been no significant changes to the loan amount or LVR.
How to Avoid Paying LMI
You may be able to reduce the cost of your payable LMI or avoid it altogether. Here are a few ways how:
Save a 20% deposit
The most straightforward approach to avoid paying LMI would be to save up the standard deposit of 20% of the property's purchase price. This ensures your LVR remains at 80%.
A 20% deposit is viewed as an adequate buffer to protect lenders should the property value depreciate, allowing them to recover the amount owed if the borrower defaults.
Some lenders may waive LMI if the borrower has a 15% deposit, but this usually comes with higher interest rates. In such a case, it might be better to save up the remaining 5%.
Arrange a Guarantor
Many lenders will waive LMI if the borrower is backed by a guarantor, such as a parent or legal guardian. Do note though, that if you are unable to make your loan repayments, your guarantor is liable to cover them.
Guarantor home loans generally allow you to borrow more than 80% of the property's value without paying LMI. Some lenders may even offer 100% or 110% LVR if you have a guarantor to back you up.
Leverage Employment
Borrowers in certain professions (doctors, nurses, midwives, lawyers, etc.) may be able to qualify for waived LMI. However, you may also need to be a member of specific associations within your profession to be eligible.
For example, eligible registered nurses and midwives applying for a home loan with Westpac with a 10% deposit can avoid LMI if they earn over $90,000 per annum (correct at the time of writing).
Before signing on the dotted line, check with your lender to find out if they offer any LMI waivers tailored to your profession.
Use Government Assistance
Under Housing Australia's Home Guarantee Scheme (HGS), previously called the First Home Loan Deposit Scheme, eligible home buyers can purchase a property with a deposit as low as 2-5% without paying LMI.
Each financial year until 30 June 2025, the government offers 50,000 places across HGS' three schemes, detailed below:
-
The First Home Guarantee (FHBG) scheme enables successful applicants with a deposit as low as 5% to buy their first homes without paying LMI. Eligible first-home buyers can borrow up to 95% of the property value, with the federal government providing their lenders with a guarantee of up to 15%. This scheme opens a total of 35,000 places each financial year.
-
The Regional First Home Buyer Guarantee (RFHBG) supports eligible first-home buyers in purchasing a home in a regional area even with only a 5% deposit, as the government takes care of the remaining 15%. A total of 10,000 places are available under this scheme each financial year.
-
The Family Home Guarantee (FHG), meanwhile, assists eligible single parents with at least one dependent child in buying a home with as little as a 2% deposit. Each financial year, the government provides 5,000 successful applicants with a guarantee of up to 18% of the property purchase price.
If you're a first-home buyer looking to take advantage of the scheme, note that there are specific price caps on the property you can purchase. The cap depends on which state or territory you live in and the area within each. Additionally, individual applicants must earn an annual taxable income of no more than $125,000, and couples $200,000, to become eligible.
Check if you might also be eligible for state government-based grants, usually called First Home Owner Grants (FHOG), typically offering around $10,000. This could help boost your deposit enough to avoid paying LMI.
Use Alternative Lending Methods
Tricky scenarios call for smart solutions. Government schemes aren't available for everyone - places are limited, and they tend to have income and property price caps.
There are a range of lenders out there that make it possible to borrow 95% or more of the property's value without paying LMI. A couple of examples include:
-
Sucasa: Has a tiered lending structure to avoid the need to use LMI, with the choice of paying higher fees or a higher interest rate for the loan amount greater than 80% LVR.
-
OwnHome: Funds the gap between 80%-100% and works with lenders to make sure the borrower doesn't pay LMI.
Note that such funding arrangements could mean higher interest payable in the long term, and carries a risk if you need to sell your home out of financial difficulty. However, they could provide a pathway to get you into your own home sooner, and hopefully build equity and realise capital gains.
Should I pay LMI or save up a sizeable deposit?
Choosing to buy home sooner with small deposit and pay LMI or wait until you've saved up enough down payment depends on various factors.
Do you bite the bullet and pay a couple thousand dollars in Lenders Mortgage Insurance (LMI) to secure your dream home as soon as possible? Or should you save up for a big deposit to avoid paying this premium?
The answer varies for everyone and depends on individual circumstances. If house prices increase while you're saving for a 20% deposit, you might end up paying more for the property than if you'd bought it with a smaller deposit and paid LMI. Additionally, if prices rise significantly, your saved 20% deposit might only cover 15% of the new price, requiring even more savings to avoid LMI.
On the other hand, waiting to save a larger deposit can help you save on LMI costs and reduce your loan repayments. However, this could mean missing out on the chance to buy the home you've had your eye on. In a red-hot market with high competition and rapidly rising prices, paying LMI to get into the market sooner might be a worthwhile trade-off.
Ultimately, it's crucial to evaluate your financial situation, market conditions, and long-term goals. You may also consider seeking personalised advice from a financial advisor to help you make the best decision.
Photos by Freepik
An earlier version of this article written by Hanan Dervisevic
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