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Lenders’ mortgage insurance

If your deposit is less than 20% of the property's value you'll generally have to pay lenders' mortgage insurance. Learn how LMI works and how to avoid it.

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Lenders’ mortgage insurance explained

When you take out a mortgage, lenders’ mortgage insurance (LMI) protects your lender if you can’t make your repayments. Borrowers with smaller deposits (under 20% of a property’s value) usually have to pay LMI.

LMI can cost anything from a few thousand to tens of thousands of dollars. Here’s an example:

  • You buy a $700,000 house with a 5% deposit ($35,000)
  • You borrow 95% = $665,000 mortgage
  • Your LMI cost (estimate) = $29,990
  • LMI is protection for your lender, not for you. Don’t get confused by the name. It doesn’t cover you if you miss repayments due to illness or job loss. Mortgage protection insurance covers you in these situations, and it’s a form of life insurance that has nothing to do with LMI.

How much is lenders’ mortgage insurance?

The amount you pay for LMI depends on the size of your loan and your deposit size, but in some cases, LMI can add thousands of dollars to the cost of buying a home.

What can affect the cost of lenders’ mortgage insurance?

  • Whether it is a rental property or you plan to live in it. Some financial institutions do not differentiate between investment and residential properties.
  • Your chosen lender’s insurer. Premiums vary according to the LMI provider, just like other insurance.
  • The deposit. Most lenders let you borrow up to 95% of the property’s value.
  • Employment status. If you are self-employed or receive Work and Income benefit, it can affect the perceived risk of lending, so it may affect your LMI premium.

How to avoid lenders’ mortgage insurance

There are ways to avoid LMI, or at least minimise your costs.

  • Keep your loan to value ratio below 80%. If you have a 20% deposit (LVR of 80%) you likely won’t have to pay LMI (investors in Auckland may have to pay LMI with anything less than a 30% deposit). In other words, save a bigger deposit to avoid LMI with most traditional home loans.
  • Take out a family guarantee. A family guarantee or family pledge is when one of your family members guarantees part of your loan with their own property. They can usually nominate how much to pledge, and this is then added to your deposit amount.
  • Get a shared equity agreement. This rare financial arrangement allows a third party (a family member, lender or government organisation) to contribute some of your purchase costs. In exchange, the contributor receives a portion of your equity when you sell. A shared equity agreement can help you avoid LMI by increasing your deposit size.

Some lenders provide their own LMI. It’s not really possible to compare lenders mortgage insurance providers because lenders typically have an exclusive agreement with one insurer.

Can I get a refund on my premiums?

Probably not. If you’re exiting your loan and have repaid it within two years of settlement it might be possible to get a partial refund, depending on your lender. It never hurts to ask.

To request a refund, contact your lender and tell them that you’d like to apply for an LMI refund. They then notify you of the process and the next steps required. You may need to put forward a written request.

How do I pay my LMI?

You can pay your lenders’ mortgage insurance costs upfront, or you can capitalise it, which means you can borrow your LMI costs along with your loan and pay it off over time.

How does LMI capitalisation work?

  • You buy a $300,000 property
  • You borrow $270,000
  • Your LMI premium is around $4,000.
  • You capitalise the costs and borrow $274,000
  • You capitalise your LMI premium and repay it with the loan, adding an extra $20 a week to your repayments.

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