With news that NAB have just expanded their LMI waiver to include more professionals, we thought it was a good time to touch on the concept that crops up with many of our clients trying to purchase a home. What is Lenders Mortgage Insurance and do I need to pay it?
What is Lenders mortgage insurance?
Lenders Mortgage Insurance (LMI) is a type of insurance in Australia that protects lenders if a borrower defaults on their home loan and the property sale doesn’t cover the outstanding debt.
How Does LMI Work?
When a borrower has a smaller deposit, the lender perceives a higher risk of loan default. To mitigate this risk, lenders require LMI, which covers potential losses if the borrower defaults and the property sale doesn’t recoup the outstanding loan amount. It’s important to note that LMI protects the lender, not the borrower. The cost of LMI is usually a one-off premium paid by the borrower at loan settlement, and it can be substantial, depending on the loan amount and LVR. In many cases, borrowers choose to capitalise the LMI premium into their loan, spreading the cost over the loan term.
When is LMI Required?
LMI is typically required when a borrower has a deposit of less than 20% of the property’s purchase price. This means their Loan-to-Value Ratio (LVR) is higher than 80%. Since higher LVR loans are considered riskier for lenders, LMI helps mitigate their potential financial losses.
Who Pays for LMI?
Although LMI protects the lender, the cost is usually passed on to the borrower. It is a one-off premium paid at loan settlement, which can either be:
– Paid upfront by the borrower, or
– Added to the home loan (capitalized), meaning it’s repaid over time with interest.
How Much Does LMI Cost?
The cost of LMI varies based on factors like:
– The loan amount
– The deposit size (LVR)
– The lender and insurer used
For example, a $500,000 home loan with a 10% deposit may attract an LMI premium of around $8,000–$12,000.
Who Provides LMI in Australia?
Most lenders use one of the two main LMI providers:
– Helia (formerly Genworth Financial)
– QBE LMI
Some major banks have their own Lenders Mortgage Insurance policies.
Alternatives to LMI
Borrowers looking to avoid paying Lenders Mortgage Insurance can:
– Save a 20% deposit
– Use a family guarantor loan, where a family member offers part of their property as security
– Check for profession-based LMI waivers (some medical, legal, and accounting professionals may be eligible)
Is LMI Worth It?
While LMI adds to borrowing costs, it allows buyers to enter the property market sooner rather than waiting to save a larger deposit. However, borrowers should weigh up the additional cost before proceeding.
Lenders Mortgage Insurance (LMI) can be a significant expense for homebuyers in Australia, especially those with deposits smaller than 20% of the property’s value. However, certain professionals may be eligible for LMI waivers, potentially saving thousands of dollars.
LMI Waivers for Professionals
Several Australian lenders offer LMI waivers to professionals in specific fields due to their perceived stable income and low-risk profiles. Eligible professions typically include:
– Medical Professionals: Doctors, dentists, pharmacists, and specialists.
– Legal Professionals: Lawyers and judges.
– Accounting and Finance Professionals: Chartered accountants, certified practicing accountants (CPAs), actuaries, and other finance professionals.
– Engineering Professionals: Engineers across various disciplines.
Eligibility criteria can vary between lenders, so it’s essential to check specific requirements with each institution. Look for one of the best mortgage brokers in Perth to help you find out if you can get your LMI waived depending on your profession.
Banks Offering LMI Waivers
Several major Australian banks provide LMI waivers for eligible professionals:
– Commonwealth Bank of Australia (CBA): Offers LMI waivers to a wide range of professionals, including medical, legal, accounting, and finance professionals.
– National Australia Bank (NAB): Provides LMI waivers for professionals in the fields of finance, law, and medicine.
– Australia and New Zealand Banking Group (ANZ): Offers LMI waivers to eligible accounting professionals who are part of recognized accounting institutes.
– Westpac: Provides LMI waivers for specific professionals, including doctors, accountants, and lawyers.
It’s advisable to consult with individual lenders or a mortgage broker to confirm eligibility and specific terms.
Estimating LMI Costs
For those not eligible for an LMI waiver, understanding potential LMI costs is crucial. Several online calculators can help estimate these expenses:
– Westpac’s Stamp Duty and LMI Calculator: Offers combined estimates for stamp duty and Lenders Mortgage Insurance costs.
These tools provide estimates; actual LMI costs may vary depending on the lender and specific circumstances. Give us a call to get an initial estimate of your LMI that factors in all of your unique details.
LMI can add a substantial cost to purchasing a property with a smaller deposit. However, professionals in certain fields may qualify for LMI waivers, potentially reducing this expense. It’s essential to consult with lenders or financial advisors to explore eligibility and make informed decisions when navigating the home loan process.
The best path forward is to book a call with one of Perth’s best mortgage broker to clarify your position and talk through your options. Get in touch today.
Are you a First Home Buyer and want learn more about applying for a home loan, click here for our ultimate guide for First Home Buyers getting a loan approved.
Disclaimer: The information provided on this blog is for general informational purposes only and does not constitute financial or professional advice. While we strive to provide accurate and up-to-date information, mortgage laws and regulations can change, and individual circumstances may vary. We recommend consulting with a qualified financial advisor or mortgage broker to assess your specific situation and needs. Base Home Loans is not responsible for any actions taken based on the content of this blog. Always conduct your own research and consider seeking professional advice before making financial decisions.
