Lenders mortgage insurance, commonly called LMI, is often misunderstood. Whether it applies and how much it costs depend on the lender, deposit, property, loan and borrower profile.
Who does lenders mortgage insurance protect?
LMI protects a lender or credit provider if a borrower cannot repay the loan and the lender experiences a shortfall after recovering and selling the security property. It is not mortgage repayment insurance and does not cover the borrower against illness, unemployment or repayment difficulty.
If an insurer pays a lender's claim, the borrower may still be pursued for the remaining debt, depending on the circumstances.
When might LMI apply?
LMI commonly becomes relevant when the proposed borrowing is high compared with the lender's assessed property value. However, thresholds and policies vary. Property type, location, loan purpose, occupation and borrower profile can also influence the assessment.
A valuation lower than the purchase price can increase the assessed loan-to-value ratio and change the amount of LMI or funds required to complete.
How is the cost handled?
LMI is generally a one-off cost. It may be paid from available funds or, where permitted, added to the loan. Adding it to the loan increases the amount borrowed and can increase total interest over time.
The premium is not simply a fixed percentage. Ask for an estimate that reflects the actual proposed loan and clarify whether changes to the purchase price, deposit or valuation could alter it.
Options to consider carefully
- Building a larger deposit and allowing for purchase costs
- Reviewing whether a different eligible loan structure changes the position
- Using a family guarantee where available and appropriate
- Checking current government home-buyer support where eligible
- Comparing the cost of LMI with the cost and timing of waiting longer
A guarantee can expose another person's property or finances to risk and requires independent legal advice. Government scheme criteria change, so use the current Housing Australia home-buyer support information.
Questions to ask before proceeding
- What lender valuation will be used?
- What loan-to-value ratio is being assessed?
- How much LMI is estimated and can it change?
- Will the premium be paid upfront or added to the loan?
- How does it affect the total loan and repayments?
- Are any alternatives genuinely suitable for the circumstances?
Moneysmart provides a concise official definition of lenders mortgage insurance.
Read the First home buyer guide, return to the Guide hub, or book a consultation.