Lenders mortgage insurance (LMI) is one way to buy a property without having a 20 per cent deposit usually required by banks and lenders. It’s a premium that you pay the lender in exchange for them providing you with a home loan with a smaller deposit. Some lenders will provide home loans with just 5 per cent deposit, if LMI is paid.
With the median house price in Perth being $480,000*, a 20 percent deposit would see you needing $96,000 in savings, which could take many home buyers years to achieve.
What is it?
LMI is insurance that protects your lender in the event that you default on your home loan. If your property is required to be sold as a result of the default, the proceeds of the sale may not always cover the full balance outstanding on the loan. This could be because of the property market has declined which would mean a financial loss for the lender.
Should this be the case, the lender is entitled to make an insurance claim for any shortfall. Where a claim for loss is paid to a lender, the insurer may seek recovery from the borrower, or any guarantor, for any shortfall amount.
How much does it cost?
If you have a low deposit and need to pay LMI, you’ll need to pay a premium, like you would with any other type of insurance. The amount of premium you pay is dependent on several factors, like the loan size and property value.
Most insurers are flexible about when you pay it: it could be paid as a one-off upfront payment or the cost can be added into your regular loan repayments. In some cases, LMI may be partially refundable if your loan is repaid early. This will depend on the arrangements between your lender and their LMI provider.
What’s in it for me?
You could get into your new home with as little as 5 per cent deposit, by paying LMI. It is an alternative to using a guarantor or having to save for a bigger deposit, which may not feasible options for all first home buyers.
The beauty of paying LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later.
How much LMI will I need to pay?
The table below provides a rough estimate of the amount of LMI that could be charged, depending on the price of the property or home and land package, and the deposit amount.
Estimate costs: Lenders Mortgage Insurance
| Deposit amount | |||
| Property or package cost | 5% | 10% | 15% |
| $325,000 | $10,704 | $4,919 | $2,622 |
| $350,000 | $11,527 | $6,728 | $2,824 |
| $375,000 | $12,351 | $7,209 | $3,914 |
| $400,000 | $13,174 | $7,689 | $4,175 |
| $425,000 | $13,998 | $8,170 | $4,436 |
| $450,000 | $14,821 | $8,650 | $4,697 |
| $475,000 | $15,644 | $9,131 | $4,958 |
| $500,000 | $16,468 | $9,611 | $5,218 |
| $525,000 | $17,291 | $10,092 | $5,479 |
| $550,000 | $24,315 | $10,573 | $5,740 |
| $575,000 | $25,420 | $14,097 | $6,001 |
| $600,000 | $26,525 | $14,710 | $7,157 |
| $625,000 | $27,630 | $15,323 | $7,485 |