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What is LMI and how much does it cost?

Lenders Mortgage Insurance (LMI) is an insurance policy that covers a mortgage lender against the risk that a borrower may default on their home loan repayments. LMI does NOT cover borrowers – it only protects lenders, such as banks, credit unions and fintechs.

In Australia, Mortgage lenders typically take out LMI policies when a borrower has less than 20 per cent deposit or equity in a property. This is sometimes called having a Loan to Value Ratio (LVR) of more than 80 per cent.

Most lenders pass the cost of LMI on to the borrower. The less deposit/equity a borrower can provide a lender (or the higher the LVR), higher the LMI premium may be. LMI can cost anywhere from thousands of dollars to tens of thousands of dollars.

Who does Lender's Mortgage Insurance benefit?

Lender’s Mortgage Insurance can benefit a mortgage lender in the event that a borrower defaults on their home loan repayments, as the payout of the policy can help to offset potential financial losses.

LMI can also benefit borrowers who may not have enough savings and/or equity available for a 20% deposit on a property, but still want to apply for a mortgage sooner rather than later. While LMI may be an extra upfront expense to budget for, the potential benefits of home ownership could end up outweighing the initial cost over the long term. 

After you've spent some time paying your home loan and reducing your loan principal, you may have enough equity available to refinance your mortgage without having to pay LMI.

Tip

If you’re a borrower looking for insurance to cover your mortgage payments in the event you’re unable to do so (such as if you suffer long-term illness or injury), you may need to look into taking out a mortgage insurance or income protection insurance policy.

How do lenders calculate LMI?

The cost of LMI is typically based on the loan to value ratio (LVR) of a mortgage, as well as the size of the loan amount. The higher the LVR (or the lower the deposit) and the larger your loan amount, the more LMI may cost.

Lenders determine your LVR by making a valuation of the property and comparing the result to the proposed home loan amount. A valuer may conduct an inspection of the property in person, either from the street or going from room to room, or they may conduct a desktop valuation by comparing data about the property to recent sales of similar properties in the local area.

Once the value of the property has been calculated, it can be compared to the size of your loan to work out your LVR. For example, if a property is valued at $500,000 and you apply for a $450,000 home loan, your LVR would be 90%.

The lender will then use an LMI rate determined by your loan amount and your LVR to calculate your LMI.

How to use an LMI calculator

To estimate the cost of your LMI, our calculator needs two figures from you:

  • Your property value: If you’re buying a property, this will typically be the purchase price. If you’re refinancing, it’s the current value of your home, which may have increased or decreased since you first bought it.
  • Your loan amount: How much you plan to borrow to buy the property. For example, if you’re buying a $500,000 property with a 20 per cent deposit ($100,000), your loan amount will be $400,000.

Using these figures, our LMI calculator can estimate the cost of LMI that you’ll need to budget for if you plan to apply for a home loan with a deposit of 15, 10, or 5 per cent of the property value.

Home loan offers with lower minimum deposit requirements are more likely to charge higher interest rates. Compare home loan options and consider your choices before you apply.

Tip

Did you know that you can also use a home loan calculator to estimate the cost of monthly repayments, or to work out your borrowing power?

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How do I pay for LMI?

Using our calculator, you can estimate the cost of LMI when budgeting for your home loan’s upfront costs, which may also include mortgage establishment fees, property inspection fees, and stamp duty.

Some lenders will let you add the cost of LMI to your home loan, so it can be paid over time as part of your mortgage repayments. This can help remove a significant upfront cost from your home loan, and may only slightly increase your mortgage’s monthly cost. However, this means you’ll be charged interest on your LMI, which could lead to your LMI costing much more over the decades-long term of most home loans than it would if it was paid upfront.

How do you avoid paying LMI?

The simplest way to avoid paying LMI is to have a larger deposit or equity available to lower your LVR. However, saving up this money isn’t as easy as it sounds, especially considering the high property prices in some capital cities. Government grants and incentives (such as the First Home Owner Grant) may be able to help here. 

Some lenders may waive part of your LMI for first home buyers who fulfil certain terms and conditions. For example, you may be able to apply for a home loan with a 15% deposit and pay no LMI with certain lenders. 

Another option to avoid paying LMI is to use a guarantor. This could be a parent or other family member using the equity in their own property to guarantee your loan, or it could be a government program such as the First Home Loan Deposit Scheme

Can a broker help you avoid paying LMI?

A mortgage broker may be able to help you work out whether applying for a home loan with LMI is the best option for you, or if there are ways to offset or avoid some or all of the cost. As brokers are mortgage experts, they can look at your personal finances and recommend home loan deals with lending criteria that may better suit your financial situation, including mortgage offers that are exclusive to brokers.

A broker may be able to negotiate with a lender to help you get a better deal, help you apply for government grants, and take care of the mortgage paperwork on your behalf. A broker’s home loan expertise could be valuable if you want to use a guarantor, as this arrangement can be complex and a major commitment for both the borrower and the guarantor.

This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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Frequently asked questions

How much money can I borrow for a home loan?

Tip: You can use RateCity how much can I borrow calculator to get a quick answer.

How much money you can borrow for a home loan will depend on a number of factors including your employment status, your income (and your partner’s income if you are taking out a joint loan), the size of your deposit, your living expenses and any other debt you might hold, including credit cards. 

A good place to start is to work out how much you can afford to make in monthly repayments, factoring in a buffer of at least 2 – 3 per cent to allow for interest rate rises along the way. You’ll also need to factor in additional costs that come with purchasing a property such as stamp duty, legal fees, building inspections, strata or council fees.

If you are planning on renting the property, you can factor in the expected rental income to help offset the mortgage, but again it’s prudent to add a significant buffer to allow for rental management fees, maintenance costs and short periods of no rental income when tenants move out. It’s also wise to factor in changes in personal circumstances – the typical home loan lasts for around 30 years and a lot can happen between now and then.

How can I calculate interest on my home loan?

You can calculate the total interest you will pay over the life of your loan by using a mortgage calculator. The calculator will estimate your repayments based on the amount you want to borrow, the interest rate, the length of your loan, whether you are an owner-occupier or an investor and whether you plan to pay ‘principal and interest’ or ‘interest-only’.

If you are buying a new home, the calculator will also help you work out how much you’ll need to pay in stamp duty and other related costs.

How do you calculate how much you could save with a lower rate?

To work out how much you could save, we run the home loan details you’ve provided through our database, and search for similar home loan options that we think would be suitable for you.

We then calculate the costs of these loan options over 15 years (to keep our calculations consistent) and compare them to the cost calculations for your current home loan.

How does a mortgage calculator work?

A mortgage calculator is an extremely helpful tool when planning to take out a home loan and working out the costs. Although each mortgage calculator you come across may be slightly different, most will help you estimate how much your repayments will be. The calculator will often also show you the difference in repayments if you repay weekly, monthly or fortnightly. 

To calculate these figures, you’ll be asked to enter a few details. These include the amount you plan to borrow, whether you’re an owner-occupier or an investor, the proposed interest rate and the home loan term. It will also often show you the total interest you’ll be charged and the total amount you’ll repay over the life of the loan.  

Understanding how the mortgage calculator works, helps you to use it to see how different loan amounts, interest rates and terms affect your repayments. This can then help you choose a home loan that you can repay comfortably and save on interest costs. The mortgage calculator lets you compare the benefits and costs of home loans from different lenders to help you make a more informed choice. Use a mortgage calculator to help identify which home loan is most suitable for your requirements and financial situation.