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

Lenders’ mortgage insurance (LMI) protects your lender if you can’t repay your mortgage. Borrowers with smaller deposits (under 20% of a property’s value) usually have to pay it.

LMI can cost anything from a few thousand dollars 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.

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.
  • 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 generally 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 will 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.

More questions about lenders’ mortgage insurance

Is it worth paying LMI or should I avoid it at all costs?

Avoiding LMI will save you money. But there are times when paying LMI can be worth it.

  • If you’re stuck paying high rent and the perfect property comes on the market. If the right property comes along, you need to decide if it’s worth paying the extra cost to get home of your dreams. And keep in mind that mortgage repayments, unlike rent, add to your equity.
  • If you’re buying in a strong market and prices are rising all the time. As house prices have risen dramatically, many hopeful home buyers watched as 20% deposits became bigger and bigger. Those who jumped into the market with smaller deposits had to pay LMI, but given how fast prices rose this was often the cheaper option.

What happens if I refinance?

Theoretically you can pay LMI more than once. This could only happen if you refinanced your mortgage but the equity in your property was less than 20% of the property’s value. In other words, your initial deposit was small (say 5%) and you haven’t repaid enough to pass 20%.

In this situation refinancing might become too expensive.

My home loan was rejected because of LMI: What do I do?

There aren’t many LMI insurers in New Zealand. If your application for a home loan is rejected because of an LMI insurer’s criteria, you might want to apply for another home loan with a lender who self-insures or uses a different LMI insurer.

Mortgage brokers can help you apply with lenders who can help you.

Do home loans have to be approved by the lender’s mortgage insurer?

Applications for risky home loans also have to be approved by mortgage insurers. This is because the LMI insurer is taking the risk from the lender. You will find that mortgage insurers are just as conservative, if not more so, than lenders.

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