If you’re on the house hunt, particularly if it’s your first time buying a home, it’s a good idea to familiarise yourself with lenders mortgage insurance (LMI). It’s one of those additional fees that crops up when you’re purchasing a house but, there are some interesting facts to learn about the potential benefits of lenders mortgage insurance as well as ways you can avoid paying it. Let’s unpack LMI to ensure you know everything that’s important before you delve too deeply into the house buying process.
What is Lenders Mortgage Insurance (LMI)?
Before we outline how lenders mortgage insurance is calculated, it’s important to understand what LMI is and why it exists.
Lenders mortgage insurance is a form of insurance that a lender or financial institution can take out to cover itself against the risk of not recovering an outstanding loan balance1. This happens when a borrower is unable to meet their loan repayments, known as ‘defaulting’ on a loan2.
If this does occur, a financial institution may need to sell the property to cover the outstanding balance of the loan – we’ll go into this in more depth a bit later. The most important thing for you, as a borrower, to remember is that LMI covers the lender, not you. If you are concerned you may default on your loan repayments should something unexpected occur, you can purchase what is called mortgage protection insurance that covers sickness, disability, unemployment or death1.
How does Lenders Mortgage Insurance work?
Lenders mortgage insurance is factored in if you cannot afford to put down 20 per cent of your property’s purchase price as a deposit. At settlement time, your lender will pay the LMI fee to their insurer and then pass this fee onto you, meaning it is added on to the list of additional payments you must make on top of your deposit amount1.
So, how is lenders mortgage insurance calculated? The size of your deposit and loan are both factored into calculating lenders mortgage insurance, meaning there is no exact figure that is the same for everyone1. Your lender will notify you of how much you can expect to pay when they are preparing your loan.
When it comes to paying lenders mortgage insurance, it’s generally a one-off upfront payment that is charged at settlement time. However, there are also instances where some borrowers may be permitted to add their LMI fee to their mortgage and pay it off with their loan repayments. This depends on the lender though, so if you think this option may be better suited to your needs, it’s a discussion you would need to have with your chosen financial institution1.
What are the benefits of Lenders Mortgage Insurance?
Now, we know you’re probably wondering how can LMI have benefits to you as the borrower? Well, it doesn’t have to be another scary fee you pay at settlement time.
Given that housing prices fluctuate regularly, it can be difficult for some house hunters to save the 20 per cent deposit required to avoid LMI. Having the option to forego this deposit and pay lenders mortgage insurance instead allows more buyers to launch into the property market and achieve their financial goals sooner1.
It also means that financial institutions can broaden their borrowing scope so they are not just limited to those who can afford the 20 per cent deposit2.
How can you avoid paying Lenders Mortgage Insurance?
While there are benefits to LMI, most homebuyers try to avoid paying it if they can. Luckily, there are a few different ways you can do this.
Perhaps the most obvious way is to ensure you’ve saved 20 per cent of your property’s purchase price1. Before you start looking at houses, it’s a good idea to establish a price range you know you could afford – this allows you to take into account how much you would need to put down as a deposit. Having an approximate figure in mind could help you establish regular savings goals and mean you avoid paying lenders mortgage insurance.
If you’re a first home buyer and are not in the financial position to save a 20 per cent deposit, there are Government grants you could be eligible for. Under the Regional First Home Buyer Guarantee and the First Home Buyer Guarantee, you only need as low as a five per cent deposit for your house and can still avoid paying lenders mortgage insurance, as the Government covers the remaining deposit2. For those who are single parents or legal guardians to at least one dependent, the Family Home Guarantee is another Government scheme that could assist you in purchasing your own home without the need to pay lenders mortgage insurance2. Queensland Country Bank is one of the participating lenders for these guarantees, so it’s worth discussing this option to see whether you qualify.
For those who are ineligible for a Government grant and are finding it difficult to save a 20 per cent deposit, you may be able to nominate a reliable person as a guarantor. Basically, this means that whoever you choose to be your guarantor legally agrees to take responsibility for your loan repayments on your behalf if you are unable to pay2. This option isn’t available for everyone and also isn’t offered by every financial institution, so ensure you discuss this with your lender first.
Lenders mortgage insurance explained
Now you have a better understanding of LMI, you can see that while there are a fair number of ways to avoid paying it, if none of these options are applicable to you, it is still possible to buy a house with LMI.
Queensland Country Bank offers both variable and fixed home loans and has knowledgeable lenders who can chat through your personal situation to get you into your very own home sooner.
Terms and conditions of Queensland Country Bank’s Variable and Fixed Home Loans apply. View the relevant TMDs available at queenslandcountry.bank. Normal lending criteria, terms, conditions and fees apply and are available on request.
General Advice Warning: This information is intended to be general in nature and is not personal financial advice. It does not take into account your objectives, financial situation or needs. Before acting on any information in this article, you should consider the appropriateness of the information provided. In particular, you should seek independent financial advice.
Sources
1Insurance Council of Australia, 2021, Lenders Mortgage Insurance, https://insurancecouncil.com.au/articles/lenders-mortgage-insurance/
2Dominic Beattie & Harry O’Sullivan, 2023, What is lenders mortgage insurance (LMI)?, Savings.com.au, https://www.savings.com.au/home-loans/lenders-mortgage-insurance