The ins and outs of Lenders Mortgage Insurance

Are you looking to enter the property market in the not-too distant future, but you’re worried about setting aside a substantial amount of money for your deposit? You may want to consider Lenders Mortgage Insurance.

Lenders Mortgage Insurance (LMI) provides first home buyers with the huge benefit of acquiring a home loan when they many not otherwise be able to meet their lending requirements.  

With LMI, you can purchase your first home sooner rather than later, with a smaller deposit than would normally be needed (as little as a 5% deposit).
We have laid out some key points below to help you understand the ins and outs of Lenders Mortgage Insurance.

The purpose of Lenders Mortgage Insurance 

LMI is a one-off insurance policy which protects the lender (i.e. your bank) against financial losses if you were to default on your home loan, and in the event of worst case scenario your property is repossessed and sold.

By using LMI, lenders are able to pass on the risk factor to the insurer of the mortgage. This enables the lender to offer the same loan amount to the borrower who has less of a deposit.

In using the LMI as a protective measure, a bank will have the comfort of approving larger amounts to prospective first home buyers and a larger volume of loans.

Remember, it is not possible to transfer an LMI policy to another lender. If you refinance your original mortgage is terminated and you will make a new loan arrangement alongside a new mortgage with another lender. It is important to carefully read your lender’s policy so that you have a greater understanding of what may be applied.

How can university sector employees benefit from Lenders Mortgage Insurance?

Key Workers (such as those who are employed within the Australian university sector) might find it difficult to save for the recommended 20% deposit of their first home savings, particularly if they are relying on a single income. 

Those who work in the university sector are included in the “deposit gap dilemma,” according to this report, which is a phenomenon that faces Key Workers in major cities within Australia who cannot save their initial deposit within a reasonable time frame. The housing market significantly impacts these individuals’ choices about their career paths and where they work.

If you fall within this group of median-income workers affected by high home prices, and you’re struggling to save a substantial deposit for your first home, you may want to consider Lenders Mortgage Insurance. With LMI in place, university employees are opened up to a wealth of property options that may not have previously fit their budgets, such as more expensive houses in better locations.

The cost of Lenders Mortgage Insurance

LMI is a one-off fee which distinguishes it from more traditional insurance products. It can either be paid upfront or added on to your home loan. 
One thing to remember, is that if you add the fee to your home loan you will have marginally increased payments for the duration of your loan, as well as interest which will cover LMI premium costs.

Currently the average fee for LMI sits at $6,200. This has been calculated from a variety of factors, including:

• how much you’re planning to borrow, 
• your current employment status, and 
• whether the home is going to be your place of residence or whether it is going to become an investment property. 

Remember, you are more than within your rights to enquire with your lender how much the fee is likely to be.

Other alternatives to Lenders Mortgage Insurance

If the LMI doesn’t appeal to you, there are other ways you can avoid waiting several years to save enough for a substantial deposit for your first home. These alternatives include:

Having a guarantor

If you cannot pay your mortgage, you may be able to have someone act as your guarantor (usually a family member, such as a parent or guardian). This means that they are taking the responsibility to insure that payments are being made, and are providing their own savings and assets as security for your loan.

Applying for the Home Guarantee Scheme

The Home Guarantee Scheme was introduced by the Australian Government as an initiative for first home buyers to fast track their entrance into the property market. Eligible applicants can purchase their first home with as little as 5% deposit and do not have to pay LMI.

Learn more about our Home Loans

With Lenders Mortgage Insurance, you could potentially be living in your first home much faster than you had originally dreamed.

If you’re currently mulling over home loan options that fit in with your financial plans, you may want to visit our home loan resource centre, which is full of information and tools to help you in your decision making.