What is Lenders Mortgage Insurance? And why we don’t charge it
Buying a home is super exciting, but there are a few extra costs other than your property price. One is Lender’s Mortgage Insurance, but not all banks charge it. We explain more about Lender’s Mortgage Insurance and why some banks don’t charge it below.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance, otherwise known as LMI, is a type of insurance that protects banks if a customer can’t make their home loan repayments.
How does LMI work and why do banks need it?
LMI is offered to banks by insurance companies like QBE and Genworth, who are Aussie LMI providers. Banks take care of the paperwork and then pass this cost on to their customers.
Some banks need LMI because loaning someone more than 80% of the price of the property value comes with obvious risks.
If a homeowner is unable to pay their home loan repayments, the property may need to be sold to pay back the bank. But if the value of the property has gone down since they bought it, and the sale of their property doesn’t pay off the loan, the insurance company will jump in to make up the difference, and the insurer may then seek to recover this shortfall from the homeowner.
Is LMI added to the loan or already included?
LMI isn’t included with your loan. It’s usually added to the total loan amount. Some lenders may allow you to pay this upfront using your own funds.
How to avoid LMI (and the perks that come with avoiding)
The best way to dodge LMI is by saving a deposit of 15-20%, although the required deposit will ultimately depend on the lender. While a smaller deposit might get you into the market quicker, having at least 15-20% means:
- You’ll borrow less,
- You might not have to pay as much interest, as you are borrowing less against the property value,
- You’ll save not having to pay LMI, meaning you could top up your emergency fund or save some money for everyday life.
Why we don’t charge LMI
At ubank, we’re all about helping our customers get on the property ladder with repayments they can afford. In line with this, our loans require a deposit or equity that is at least 20% of your property amount or 15% for owner occupied principal & interest loans. Contributing more of your own funds upfront means you borrow less and could save some cash for your expenses.
Ubank offers owner-occupier P&I home loans to customers with up to 85% Loan to Value Ratio (LVR) without charging LMI. The LMI premium on an average loan size of $580K at an LVR of 85% is approximately $5,466.
Something else to consider is that if you want to refinance while your LVR is still over 80%, you might have to pay LMI twice. This could be another reason to avoid paying LMI in the first place by having a deposit of at least 15-20%.
How much is LMI?
If you do end up paying LMI, the final cost depends on a few things:
- How much you’ve borrowed
- The size of your deposit
- If you bought an investment property or a home to live in.
To work out how much LMI you might pay, the calculator here on Helia.com can work it out for you based on the property value, deposit amount, if you’re a first home buyer, loan term, and occupancy type.
Boost your home loan deposit, by scoring bonus interest with ubank’s Save account. All you have to do is have a Spend account and deposit $500 or more per month into any of your Spend, Bills or Save accounts (not including internal transfers). Then you’ll get bonus interest on combined balances up to $250K per customer across all your Save accounts (including Shared Save accounts).
Now that you’ve got the lowdown on LMI, figure out the best course of action for you. If you can wait it out and grow your deposit, you could save in the long run. Don’t forget to check out our ubank home loans for great rates on a loan to buy your dream home.