What is Lenders Mortgage Insurance (LMI)
10/6/2021
Homebuyers with modest savings or incomes will find diving into the complicated world of Lender’s Mortgage Insurance an inevitable part of their journey to own a home.
But with 25 years of experience under his belt, industry veteran Simon Kahl is able to untangle this important part of financing a property.
Unpacking Lender’s Mortgage Insurance, or LMI, the General Manager of The Loan Company said these unique fees existed to protect lenders engaging in financially riskier arrangements.
He said the safeguard was usually imposed on people who were borrowing more than 80 per cent of the value of a property, otherwise known as the loan-to-value ratio (LVR).
“LMI protects the lender from financial loss if the borrower can’t afford to meet their home loan repayments, so that if the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference,” Mr Kahl said.
“This is an important feature for the lenders as they would otherwise not be prepared to lend beyond an 80 per cent LVR, meaning all borrowers would need to contribute a 20 per cent deposit.”
Mr Kahl, who has worked in financial services since 1995, said most lenders required the client to hand over at least five per cent of what the property is worth.
For example, if a property is worth $350,000, lenders requiring a five per cent deposit would ask clients to stump up $17,500.
Clients who are unable to pay more than the five per cent minimum and request a higher loan amount will often pay a higher premium on mortgage insurance, to offset the increased financial risk assumed by the bank or other lender.
On the flip side, clients who pay a higher deposit, generally closer to 20 per cent of a property’s value, will find themselves with cheaper insurance.
“Similarly, as a loan amount decreases so does the cost of the LMI premium,” Mr Kahl said.
“If clients have a 20 per cent deposit or higher, this will generally exclude them from paying any LMI.
“Another option is to have your parents go as guarantor, which removes the mortgage insurance requirement.
“Having a parent as a guarantor not only means you avoid LMI, but you are also able to obtain a much better interest rate and your loan is more likely to be approved.”
For homebuyers in financial situations that meet the criteria for Lender’s Mortgage Insurance, Mr Kahl suggested saving up as much money as possible for a deposit.
Clients chasing sizeable windfalls of cash may consider using a tax return, selling a motor vehicle or using gifted money from family or friends.
Homebuyers who qualify for LMI but do not wish to pay it also have the option of Keystart, a government-backed lender which specialises in financing homes for first-time buyers.
Keystart does not require LMI and allows clients to use the First Home Owner Grant for a competitive two per cent deposit.
Mr Kahl said the loan agency’s strict lending criteria meant it was not suitable for everybody, and for help navigating the available options, he suggested buyers engage a mortgage broker.
When enlisted early in the home buying process, Mr Kahl described brokers as a free wealth of knowledge on Lender’s Mortgage Insurance.
He also said they proved invaluable in helping clients navigate a variety of finance questions that spring up when buying a home.
“They can help you determine how much you can borrow, look for the best interest rate for you and help with the loan application,” Mr Kahl said.
