Lenders mortgage insurance (LMI) is a one-time fee paid by the borrower that helps protect the bank from loss in the event that you are unable to make loan payments and the sale proceeds are insufficient to cover the balance of the debt.
If your loan-to-value ratio (LVR), or how much of the purchase price you are borrowing, is more than 80%, you probably need to pay LMI. LMI may be paid in full upfront or capitalized into the loan. To know more about lenders’ mortgage insurance, kindly read down.
What is Lenders’ Mortgage Insurance?
Lenders’ Mortgage Insurance, also known as LMI, is insurance that protects the lender rather than you, the borrower. Typically, it is a one-time payment made by the borrower at the time/period of loan settlement. Here are some LMI facts:
- LMI is a type of insurance that you should expect to pay if you borrow more than 80% of the value of your home.
- Lenders are protected by LMI, not borrowers.
- You do not need to arrange LMI yourself; your lender will do so.
- Saving a larger deposit can help you save on LMI.
How much is Lenders’ Mortgage Insurance?
This is based on the location of the loan, the lender, and the size of the down payment.
LMI costs vary according to the percentage of the property value borrowed and also the loan amount. The premium may also differ depending on if your contribution is made up of genuine savings or a gift.
For these reasons, an accurate cost of Lenders Mortgage Insurance cannot be determined until a property and lender are chosen, and it could be a flat fee of thousands of dollars.
The LMI premium is a one-time, non-refundable fee paid at the time of loan settlement. Most lenders will include the LMI fee in the loan amount. If the LMI is included in the loan amount, the borrower will pay interest on the whole total loan, and it will be higher.
Although the borrower pays for it, LMI is arranged by the lender rather than the borrower. Each lender has its own policy regarding when and how much LMI is required. The premium is not transferable when a borrower refinances their loan. If the new loan requires LMI, a new premium must be paid.
How is LMI calculated?
Your LMI will change depending on your Loan to Value Ratio (LVR) and the amount you want to borrow because LMI is calculated as a percentage of the loan amount.
As the LVR and loan amount rise, so does the required percentage, which typically rises gradually.
Depending on the loan, lender, and LMI provider, lenders’ mortgage insurance costs vary. Your LMI’s cost may also depend on the following variables:
- Whether your property is owner-occupied or not, it is thought that if it is also your residence, you are less likely to default on a loan.
- If you work for yourself or as a PAYG employee.
- Whether you have genuine savings or not.
- Whether you intend to apply for the First Home Owner Grant (FHOG).
How to use the calculator
Here’s a simple example of how to use the lender’s mortgage insurance calculator.
- The Property value: $650,000
- 10% of the deposit: $65,000
- The Borrowing amount: $585,000
- The LMI estimate= $12,753
In this case, you must enter the property value and the loan amount into the calculator (the property price minus your deposit).
Let’s run the calculator once more with a 15% deposit. Your borrowing amount will be reduced, as will your LMI cost.
- The Property value: $650,000
- 15% of the deposit: $97,500
- The Borrowing amount: $552,500
- The LMI estimate = $6,437
Remember, if you have a 20 percent deposit or more, you will not have to pay LMI.
How this LMI calculator works
We compared our calculator to multiple LMI estimates and developed a tool that takes your property value and loan-to-value ratio into account (LVR). This yields a premium estimate that considers the following:
- The cost of the property • The size of your deposit in relation to the overall cost of the property • The total loan amount
LMI requires you to pay a higher premium as the value of your home rises. This means that the premium on a $1 million home with a 10% down payment will be higher and bigger than the premium on a $500,000 home with a 10% down payment.
In addition, you pay a high premium for a smaller deposit.
Does LMI change depending on your location?
Yes, the amount of LMI varies according to your state or territory. The premium is the same, but there is a stamp duty on the LMI premium.
Because the above calculator does not include stamp duty, you must add an estimate for duty on top. The following are the stamp duty rates:
- VIC: 10% of the LMI premium
- WA: 10% of the LMI premium
- ACT: there is no stamp duty on the LMI premium
- NSW: 9% of the LMI premium
- NT: 10% of the LMI premium
- QLD: 9% of the LMI premium
- SA: 11% of the LMI premium
- TAS: 10% of the LMI premium
To calculate your LMI premium manually, multiply your LMI rate by the amount of your loan. For example, $90,000 multiplied by 1.463% equals $1,316.70. Then, for the state in which the property is located, add the stamp duty on LMI.