LMI
What is LMI?
Lenders Mortgage Insurance (LMI) is insurance that covers the bank in the event that a borrower defaults on their mortgage.
In the past banks would not approve loans for more than 80% of the property value (80% LVR) due to the higher risk of loss. With the introduction of LMI, lenders became comfortable lending to people with smaller deposits as the risk was taken on by a third party.
Without LMI, only a handful of first home buyers would be able to achieve their dream of home ownership. In addition to this the banks would have great difficulty sourcing their own funds on the wholesale money markets, which would mean they could not approve as many mortgages.
Who is covered by the policy?
The lender is insured, you as the borrower are not. If the property is sold and the lender does not recover the full amount of the loan, then the bank can claim on the insurance policy. However you will be required to pay the LMI premium on behalf of the lender.
Which banks use mortgage insurance?
Almost all major lenders who offer loans above 80% of the property value will use Lenders Mortgage Insurance to reduce their risk. Some examples of lenders that use LMI are:
- Adelaide & Bendigo Bank Limited,
- Advantage (A division of NAB),
- AMP Bank,
- ANZ Bank,
- Bank of Queensland (BQLD),
- BankWest (Bank of Western Australia),
- Citibank Australia,
- Commonwealth Bank of Australia (CBA),
- Heritage Building Society,
- Homeloans Limited,
- Homeside Lending (A division of NAB),
- ING Direct / ING Bank,
- National Australia Bank (NAB),
- RAMS Home Loans,
- St George Bank (StG / SGB),
- Suncorp Metway &
- Westpac Banking Corporation (WBC).
Who are the mortgage insurers?
The two main mortgage insurers in Australia are QBE LMI and Genworth Financial. There are some other minor providers & some that are owned by the banks themselves, however directly or indirectly these two insurers take on the risk of the majority of Australian mortgages for more than 80% of the property value (80% LVR).
Do I need approval from the insurer?
Yes, the mortgage insurer will need to approve your loan as well. You do not need to submit an application to them, your bank will automatically upload your application into the mortgage insurer’s system for them to assess.
The mortgage insurers are renowned for being even more conservative than the banks! In particular they tend to use a method of assessment known as credit scoring, which means your application is assessed by a computer algorithm. There is little common sense taken into account and few exceptions made to their lending criteria.
Adding the LMI to your loan
Depending on which lender you apply with, you may be allowed to add the LMI premium to your loan amount. So for example if you are buying a property for $500,000 and you are borrowing $450,000 then your LMI premium may be $5,500. The lender may approve a loan for $455,500 so that you do not need to pay the LMI from your own savings.
The premium is paid automatically at settlement by the bank and is deducted from the proceeds of the loan.
How can I calculate my LMI premium?
Your lender or mortgage broker can calculate how much you will pay in LMI. Please note that each lender has their own LMI premium rates, some of which are significantly more expensive than the others.
You can compare LMI premiums by using an mortgage insurance calculator.
Can I choose which LMI provider I use?
No you cannot choose which mortgage insurer your bank uses. Each lender has an agreement with one or two providers, and cannot use other providers at your request. If you would like to go with a particular LMI provider to get a cheaper premium then you will need to apply with a lender that has an agreement in place with that provider.
How can I avoid LMI?
There are three main ways that you can avoid paying Lenders Mortgage Insurance:
- Borrow 80% or less of the value of your property.
- Apply for a family pledge home loan with the support of your parents.
- See if you qualify for waived mortgage insurance.
Learn more about LMI
You can learn more about Lenders Mortgage Insurance from the Home Loan Experts LMI page. Here you will find plenty of information about the way LMI works and information on how to obtain the cheapest LMI premium.
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