When you borrow money for a home loan in Australia—whether you’re buying a property to live in or as an investment—most lenders will allow you to borrow up to 80% of the property’s valuation. However, if you need to borrow more than 80%, which means your Loan to Value Ratio (LVR) exceeds 80%, most lenders will require you to take out Lenders Mortgage Insurance in Australia.
What is LMI?
Lenders Mortgage Insurance (LMI) is insurance that protects the lender, not you as the borrower. It’s designed to safeguard the lender in the event you default on your home loan. If the lender is forced to sell the property and there’s a shortfall between the sale price and the loan balance, the lender can claim that shortfall from the mortgage insurer.
Importantly, if the mortgage insurer pays out to the lender, they can still pursue you (or any guarantors) for the amount paid out. So, LMI protects the lender—not you—and doesn’t remove your financial responsibility.
Is LMI expensive?
Yes, it can be. The cost depends on several factors, including:
- The amount you borrow
- The loan term
- Your LVR
Can you borrow the LMI premium?
Yes, you can choose to add the Lenders Mortgage Insurance (LMI) premium to your loan amount, but this increases your LVR.
For example:
- If you have a $50,000 deposit and need to borrow a $9,000 LMI premium, your loan becomes $459,000 on a $500,000 property, resulting in an LVR of 91.8%.
- With a $25,000 deposit and a $16,000 premium, your loan would be $491,000, pushing your LVR up to 98.2%.
This higher LVR could limit which Small business loan lenders are willing to offer you a loan and affect the interest rate and fees you’re charged. Plus, because you’re borrowing more, your repayments will be higher, and you’ll pay more interest over time.
Should you take out LMI?
That depends on your personal circumstances. Lenders Mortgage Insurance in Australia can be a useful tool to help you enter the property market sooner if you don’t have the full 20% deposit—but it comes at a cost.
There are many other factors to consider before committing to a property purchase. To get tailored advice and explore your options, it’s best to speak to your Finance Shed Broker!