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> Lenders mortgage insurance
When you take out a mortgage to buy a property under certain circumstances
you may be required to pay Lenders Mortgage Insurance (LMI). LMI is compulsory
for institutions on certain loans.
What is LMI?
Lenders Mortgage Insurance is enforced by government regulation. It requires
the vast majority of lenders to re-insure part of the risk that a mortgage
will default with a specialised insurer. The premiums are low to start,
but as the risk goes up the premium goes up exponentially. Above a certain
point it may become quite significant and you need to allow for this when
you borrow.
When will you pay LMI
Depending on whether your loan is a full documentation (normal) loan or
a Lo-Doc loan will determine when LMI will be payable.
In general it can be summarised as follows:
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Full Documentation – payable when LVR > 80%
Lo – Doc / No – Doc – payable when LVR > 60%
LVR = Loan to Value Ration = Total Value of Loan /
Value of Loan Security |
The above is a guide only. In truth LMI is often payable below these levels,
but the premium is so small the premium is simply borne by the lending institution.
Accordingly, in some cases they may choose to waive it to a slightly higher
level (because they choose to pay it on your behalf).
How does it work?
As noted earlier, the higher the value of your loan as a proportion of
the value of your security property, the greater the risk you will default
and the bank will have a problem with the loan. Accordingly the premium
that you must pay for the bank to re-insure the loan also goes up. The premium
rate may also differ depending on whether the loan is for your own home
or investment. It may also differ slightly from state to state.
In simple terms the rate used to calculate the premium is a straight percentage
of the loan amount. But the goes percentage generally goes up every time
your LVR goes up 2% (for some lenders it may be 1% bands). That is there
is one percentage for 80 – 82%, then a slightly higher one for 82 – 84%,
and so on and so on. Accordingly the LMI at higher LVR’s may en dup
being tens of thousands of dollars on larger loans.
Usually you do not pay the LMI yourself; rather it is included in the loan
amount provided by your lender.
Lo – Doc and No-Doc loans usually work a bit differently and it is
best to enquire with the specific lender.
Some Examples
As stated earlier LMI is based not just on the loan amount, but the loan
amount as a proportion of the security property. The following is an example
of LMI on the same $500 000 loan for differing security values. Real values
have been used, but may change over time. If you are going to be paying
LMI then you should discuss it with your Creative Finance Broker. However
they do give you a good idea.
| Loan Amount ($) |
LVR Band (%) |
LMI Rate (%) |
Cost ($) |
| 500 000 |
80.00 – 82.00 |
0.43 |
2 150 |
| 500 000 |
82.01 – 84.00 |
0.65 |
3 250 |
| 500 000 |
84.01 – 86.00 |
0.81 |
4 050 |
| 500 000 |
86.01 – 88.00 |
0.97 |
4 850 |
| 500 000 |
88.01 – 90.00 |
1.13 |
5 650 |
| 500 000 |
90.01 – 92.00 |
1.30 |
6 500 |
| 500 000 |
92.01 – 94.00 |
1.46 |
7 250 |
| 500 000 |
94.01 – 95.00 |
1.62 |
8 100 |
A simple but effective tip
You can’t avoid LMI but understanding how it works may save you a
fair chunk of your hard earned money. The simple trick is to remember that
LMI works in bands of 1 or 2%. So if you are looking to borrow and your
LVR was 90.1% and you could find a way to reduce it to 89.9% you would drop
a category and the percentage payable on your whole loan would drop. Sometimes
finding a few hundred extra dollars could make all the difference.
For example – finding $500 (or even less) to take you down an LMI
band may save you $1 000 or even much more in LMI.
In summary it is worth checking this with your mortgage consultant. If
you have to you can pay the full amount, but if you can it may mean a
tremendous saving.
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