Understanding lender’s mortgage insurance (LMI)

If you’re looking to buy a home or investment property, or considering refinancing, it helps to understand the role of lender’s mortgage insurance.

What is lender’s mortgage insurance?

Lender’s mortgage insurance (LMI) protects your lender when you take out a home loan where there’s an increased risk associated with your loan.

If you have a deposit of at least 20% of a property’s purchase price, generally you won’t be asked to pay this type of insurance*.

However, if a lender (such as a bank or financial institution) agrees to lend you more than 80% of the property’s value, there is a higher risk that—if the loan isn’t repaid as agreed—the lender may lose money.

That’s where LMI comes in. It’s important to understand it’s there to protect the lender, not the borrower, unlike some other types of insurance.

When do I need lender’s mortgage insurance?

As a property buyer, you may need LMI if your deposit is less than 20% of what the lender thinks your property is worth, sometimes called a bank or lender-assessed valuation. Note that your lender’s value of the property may not be the same as the purchase price you pay, or what you believe your existing home is worth.

What is the cost of LMI?

It is a one-off cost that will generally come down to the lender you choose, the loan amount, the size of the deposit you have, and the value of the property that you’re looking to buy or refinance.

LMI is calculated as a percentage of the loan amount. It varies depending on a number of factors including your loan to value ratio and how much you plan to borrow.

Alternatively, you may be able to add the lender’s mortgage insurance fee to your total home loan amount. However, it’s important to note that this will increase what you owe, what you will have to pay back in interest, as well as your minimum monthly loan repayments.

Can I avoid paying LMI?

If you can’t save up a 20% deposit, you could avoid the costs of lender’s mortgage insurance if someone acts as a guarantor for your home loan.

A guarantor is responsible for paying back the entire loan if the borrower can't. The property to be purchased or refinanced acts as partial security for the lender, and the equity in a guarantor’s property provides additional security. Guarantors generally need to be immediate family members, though each provider may have its own terms and conditions.

Risks of having a guarantor

• The guarantor’s property and credit rating could be put at risk if the borrower doesn’t repay the loan.
• By tying up the equity in their own home, the guarantor may not be able to use it if they need to. 
• Relationships could be affected if things don’t go to plan.

It’s important that your potential guarantor understands what’s involved, and seeks legal and financial advice before acting as a third party on your loan.