LMI: What You Need to Know About Upfront Costs

If you're considering taking out a mortgage, you've probably heard of lenders mortgage insurance (LMI). LMI is an insurance policy taken out by the lender in order to protect them in the event that you default on your loan. But what many people don't know is that there can be significant upfront costs associated with LMI. In this blog post, we'll explain what LMI is, the various types of LMI, and the upfront costs that you need to be aware of when taking out a loan. By the end, you'll have all the information you need to make an informed decision about whether or not LMI is a good fit for your financial situation. So let's dive in!

What is LMI and How Does it Work?

LMI, or Lenders Mortgage Insurance, is a type of insurance policy taken out by the lender when a borrower takes out a mortgage. It is designed to protect the lender in the event that the borrower defaults on the mortgage.

In Australia, LMI is typically required when the borrower has less than a 20% deposit. This is because lenders want to be sure that they’ll be able to recover their money if a borrower defaults on their mortgage.

When LMI is taken out, the borrower pays an upfront insurance premium, which is usually between 1-3% of the loan amount. This insurance is taken out by the lender and the borrower is responsible for all costs associated with it.

It’s important to remember that the LMI premium is a one-off payment and does not need to be paid again as long as the mortgage remains in place. However, if the borrower refinances, they will be required to pay the LMI premium again.

When considering LMI, borrowers should make sure to compare the total cost of the loan (including the LMI premium) over the loan’s lifetime against the cost of a loan with a higher deposit. This is because even though the LMI premium can seem expensive upfront, it could still be cheaper in the long run than taking out a loan with a higher deposit.

Finally, borrowers should note that LMI can be avoided altogether if they can save up a 20% deposit. This is because the larger the deposit, the less risky the loan is for the lender, so there is no need for them to take out LMI.

How Much Does LMI Cost?

LMI, or Loan Mortgage Insurance, can be a costly upfront expense when taking out a home loan. The exact cost of LMI depends on the size of the loan, the loan-to-value ratio of the property, and the type of loan being taken out.

Generally, LMI premiums are calculated as a percentage of the loan amount, and the higher the loan amount and loan-to-value ratio, the higher the cost. For example, if you are taking out a loan of $500,000 with an LVR of 80%, you can expect the LMI premium to be around 0.6% of the loan amount or $3000.

It is important to note that the lender is responsible for paying the LMI premium, not the borrower. However, the borrower will still need to pay for it in the form of an additional cost to the loan. This cost is typically capitalised into the loan, meaning the borrower will be paying interest on the LMI premium as well.

For those considering taking out a loan, it is important to factor in the cost of LMI when comparing loan products and assessing affordability. It is also important to remember that LMI is a one-off payment, so you will only need to pay it once. This means that once you have paid off your loan, you will no longer have to pay for LMI.

Ultimately, LMI is an important expense to consider when taking out a loan. Make sure to do your research and to factor in the cost of LMI into your loan budget to ensure you are making an informed decision.

How is LMI Calculated?

When it comes to understanding how lenders mortgage insurance (LMI) is calculated, it is important to understand that the insurance provider will take into account a variety of factors to determine the amount of the insurance premium. These factors can include the size of the loan, the loan-to-value ratio, the borrower’s credit history, and the loan term.

The loan-to-value ratio is an important factor in determining the amount of LMI required. This ratio is calculated by dividing the loan amount by the value of the property being purchased. The higher the loan-to-value ratio, the higher the LMI premium. For example, if the loan amount is 80% of the property value, the LMI premium will be higher than if the loan amount is 60% of the property value.

The borrower’s credit history is also considered when calculating LMI. Lenders will review the borrower’s credit history to determine the risk of the loan. A borrower with a good credit history will generally receive a lower LMI premium than a borrower with a poor credit history.

The loan term is also taken into account when calculating LMI. A loan with a longer term will generally result in a higher LMI premium than a loan with a shorter term.

When considering LMI, it is important to think about how these factors can affect the amount of the insurance premium. It is also important to consider the impact of the LMI premium on the overall cost of the loan. Although the upfront cost of LMI is typically paid by the borrower, it can add significantly to the total cost of the loan over the life of the loan. It is important to understand all the costs associated with a loan, including the LMI premium, before signing any loan documents.

Are There Alternatives to paying for LMI?

When considering whether or not to pay for Lenders Mortgage Insurance (LMI), it's important to understand that there are alternatives to paying for this type of insurance. These alternatives can help to reduce upfront costs associated with purchasing a property, but it is important to understand the pros and cons of each option.

One alternative to paying for LMI is to increase the size of your deposit. By increasing the size of your deposit, you can reduce the amount of money that needs to be borrowed. This can reduce the amount of LMI that needs to be paid, as the loan to value ratio will be lower. However, this option is not always feasible for everyone, as it requires a large sum of money.

Another alternative is to split the loan into two parts. The first part of the loan would be taken out on a standard variable rate, and the second part could be taken out on a low or no-cost loan. This can reduce the amount of LMI you would need to pay, as the loan to value ratio will be lower. However, it can also be more expensive in the long run, as the interest rate on the low or no-cost loan may be higher than the standard variable rate.

Finally, you could also consider a guarantor loan. This type of loan involves a family member or close friend who agrees to guarantee a portion of the loan. This can help to reduce the amount of LMI that needs to be paid, as the loan to value ratio will be lower. This option does carry some risk, however, as it involves a family member or close friend being financially liable for the loan.

When considering these alternatives, it is important to weigh up the pros and cons of each option and determine which is the best option for your circumstances. It is also important to seek professional advice from a qualified mortgage broker or financial adviser, to ensure that you are making the right decision.

We understand you and we want to help

In conclusion, LMI can be a great tool to help you secure a loan, but it does come with upfront costs. We understand that this can be a confusing process and we at Ello Lending would be more than happy to help you navigate the process. If you have any questions please feel free to reach out to us, and we’ll be more than happy to help you. Thank you for reading and we look forward to hearing from you soon.