Lenders Mortgage Insurance (LMI) Explained
Lenders Mortgage Insurance otherwise known as LMI is a fee charged by lenders for loans which have less than 20% deposit at time of purchase. LMI protects the lenders in the unfortunate event of the borrower defaulting on their home loan – which is at a higher risk when a lower deposit is used. Keep in mind that LMI is not to protect you, but the lender’s interests – you are still liable for any outstanding debts and repayments. By talking to an experienced mortgage broker, they will be able to ensure you are on the best possible path forward and ensure the structure is working correctly for your short and long term goals.
Lenders Mortgage Insurance is paid at settlement with all other lender and government charges, it is not a cost that you need to pay from cash funds as this can be added to the loan – referred to as capitalisation.
How does a LMI loan differ from an uninsured loan with a Loan to Value Ratio (LVR) below 80%?
- Under 80% LVR there are no LMI charges payable
Loans under 80% LVR are generally easier to finance and can lead to quicker turnaround times, more flexibility with lenders policies (if a property is partially damaged, the insurer may not allow the purchase, but without LMI it would be possible), potentially no full valuations required.
- Above 80.01%-95% LVR LMI is applicable to the loan at time of settlement
Loans that over 80% LVR will incur a one off fee charged on the loan at settlement, generally can be added to the loan so long as the respective LVRs are maintained.
Depending on the lender and Loan to value ratio (LVR), the mortgage insurer may need to approve your loan as well as the lender. This means that you can potentially be declined on a loan that the lender is happy to offer.
How is LMI Calculated?
Lenders Mortgage Insurance rates are scaled – the higher the LVR, the higher the rate of LMI is charged, likewise the higher the loan value, the higher the charge. As such a high LVR loan with a large loan amount can result in an extremely large LMI charge.
How to make the most of LMI
Lenders Mortgage Insurance is calculated as a multiplier against the LVR. As the LVR and loan amount increases, the multiplier increases at a rapid rate. There is a point where you can minimise your deposit amount, but before the LMI charge rate rapidly increases – which is at 88% LVR otherwise known as the “sweet spot” (and allowing capitalising of the LMI, up to a maximum LVR of 95%). Here’s an example of the subtle differences which cause significant savings:
| Scenario: | 80% LVR | 85% LVR + LMI | 90% LVR + LMI | 95% LVR + LMI |
| Purchase Price | $450,000 | $450,000 | $450,000 | $450,000 |
| Loan Amount | $360,000 | $382,500 | $405,000 | $427,500 |
| LMI Charge | $NIL | $4,144 | $8,480 | $15,988 |
| Total LVR | 80% | 85.96% | 91.87% | 98.34% |
Exemptions
There are some lenders offering 85% LVR with no LMI as a promotion, this has been a temporary offer which has been a marginal saving for a lot of customers – however it cannot be relied upon to be offered indefinitely.
Likewise a number of lenders allow customers within certain industries which meet set criteria (income levels, industry membership) access to lending up to 90% LVR with no LMI charge. Industry professions can include lawyers, accountants, engineers, doctors etc.
Conclusions
Both a cost and a tool, Lenders Mortgage Insurance is an important consideration for all people looking to purchase property, and can be useful if used correctly and in a measured way. By strategically using specific Loan to Value Ratios you can contain costs and open up options to grow your portfolio if you want to travel down that path. By talking to an experienced mortgage broker, they will be able to ensure you are on the best possible path forward and ensure the structure is working at the maximum potential for you.
If you have a question regarding specific information regarding Lender’s Mortgage Insurance, or would like to have a discussion about your lending structure and the options available to you, get in touch with your mortgage broker Gerry and he will be able to assist with answering any questions you have.Original Article information from Precision Funding’s blog.