Frequently Asked Questions (FAQ) about Lenders Mortgage Insurance (LMI)

1. What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a one-off insurance premium that protects the lender—not the borrower—in case the borrower defaults on their home loan repayments. It is typically required when a homebuyer has a deposit of less than 20% of the property’s purchase price.

2. Why do lenders require LMI?

Lenders require LMI to mitigate the financial risk of lending to borrowers with a small deposit. If a borrower defaults on their loan and the property is sold for less than the remaining loan balance, the lender can claim the shortfall from the insurance provider.

3. When do I need to pay LMI?

LMI is usually required when the Loan-to-Value Ratio (LVR) exceeds 80%, meaning the borrower has less than a 20% deposit. The cost is typically added to the home loan or paid upfront at settlement.

4. How is the LVR calculated?

LVR is calculated using the formula:

LVR = (Loan Amount / Property Value) x 100

For example, if a borrower is purchasing a property worth $500,000 with a $50,000 deposit, their loan amount is $450,000. This results in an LVR of 90%, which means LMI would likely be required.

5. How much does LMI cost?

LMI costs vary based on the lender, loan amount, and LVR. It can range from a few thousand dollars to tens of thousands. The premium is usually higher for loans with higher LVRs.

6. Can I avoid paying LMI?

Yes, there are several ways to avoid or reduce LMI:

• Save a larger deposit: A 20% deposit eliminates the need for LMI.
• Use a guarantor loan: A family member can provide additional security, reducing the LVR.
• Government schemes: The First Home Loan Deposit Scheme (FHLDS) helps eligible buyers purchase with a 5% deposit without paying LMI.
• Certain professions: Some lenders waive LMI for specific professions (e.g., doctors, accountants, and lawyers).

7. Does LMI protect me as the borrower?

No, LMI only protects the lender. If you default on your loan, you are still responsible for any shortfall even if the lender claims against the LMI policy.

8. Can LMI be refunded if I pay off my loan early?

In most cases, LMI is non-refundable, even if you refinance or pay off your loan early. Some insurers may offer partial refunds under specific conditions, so it’s worth checking with your lender.

9. Is LMI the same as mortgage protection insurance?

No, mortgage protection insurance is a separate product that protects the borrower by covering repayments in case of unemployment, illness, or death. LMI solely benefits the lender.

10. Should I speak to a finance broker about LMI?

Yes, a finance broker can help assess your home loan options, calculate potential LMI costs, and explore strategies to minimise or avoid it. Seeking professional advice ensures you make informed decisions about your home loan and financial obligations.

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