What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is insurance that protects the lender in the event that you default on your home loan.

It’s only applicable if your home loan poses a high risk to the bank which is typically when you’re borrowing more than 80% of the purchase price. Can you avoid this cost?

Why do I need to pay LMI?

As a general rule, you will need to pay LMI if you are borrowing more than 80% of the property value.

If you are self-employed and applying for a low doc loan because you cannot prove your income, LMI will apply when borrowing more than 60% of the property value.

Mortgage insurance is arranged by your lender or bank during your loan approval process so you don’t have to worry about any additional paperwork.

When do I pay LMI?

You will have the Lenders Mortgage Insurance (LMI) premium deducted from the loan funds when they are advanced.

For example, if you borrow $500,000 and the LMI premium is $5,000, then when your loan is advanced you’ll receive $495,000.

The only exception to this is if you’re able to “capitalize” or add the cost of the LMI premium on top of your mortgage. You won’t avoid LMI but you will avoid having to pay it upfront.

 

Who is protected by LMI?

Mortgage insurance does not protect you as the borrower, it only protects the lender. If you are unable to repay the loan and the lender does not recover all of their money then they can make a claim with the insurer.

This insurance does not cover you for damage to the property that is being used as security for the mortgage. Damage to your property is normally covered by your building insurance policy or, if you have a strata title property, then it will be covered by your strata’s building insurance policy.

LMI should not be confused with loan protection insurance or mortgage protection insurance, which covers you, the borrower, in the event that you are unable to repay your loan.

How do I avoid LMI

You can avoid the cost of LMI by saving up a 20% deposit in genuine savings.

However, depending on the purchase price of the price, this can be a huge challenge for most people.

The next best thing is to ask your parents or a close relative to act as a guarantor for your mortgage.

In this way, you save on the costs of LMI and borrow up to 110% of the property value including the costs of completion.