Everything You Need to Know About Lenders Mortgage Insurance (LMI) in Australia.
Lenders Mortgage Insurance (LMI) in Australia is an essential tool that allows potential homeowners to buy property with a deposit of less than 20%. Most major banks in Australia require borrowers to pay LMI if they have less than a 20% deposit and do not have a guarantor. This insurance is a one-time premium, typically added to your loan at the beginning.
LMI protects the bank in case you default on your loan, allowing them to claim against any losses.
Exemptions Under Government Schemes
If you are applying through a Government Scheme, such as the First Home Guarantee or Family Guarantee, you will not need to pay LMI.
Should You Pay LMI Upfront or Capitalise It?
It is generally advised to capitalise your LMI onto your loan. This approach usually results in lower overall costs than paying the LMI upfront. Since LMI is calculated based on the base loan, adding a higher deposit and capitalising the LMI is often cheaper in the long run.
How to Apply for LMI
The bank will handle the LMI application for you. Once you submit your home loan application, the bank will prepare and submit an LMI application to the insurance provider unless the lender has a Designated Underwriting Authority (DUA).
Do You Need LMI?
If your deposit is less than 20%, traditional banks will typically require you to pay LMI. Some non-bank lenders do not require LMI but may charge a different fee, which can sometimes be more expensive. This can be a good alternative for those who do not meet LMI eligibility criteria.
Does LMI Protect You?
No, Lenders Mortgage Insurance is for the bank's benefit and does not protect you if you cannot make your repayments. For personal protection, consider options like Mortgage Protection Insurance, Income Protection, and Life Insurance.
LMI Costs
To estimate your LMI premium, you can use online calculators, but for a precise figure, consult a mortgage broker. Remember, it's often cheaper to include the LMI in your loan rather than paying it upfront.
What is a Designated Underwriting Authority (DUA)?
Some banks have a DUA, allowing them to approve your LMI application on behalf of the insurance provider. This can streamline the approval process, making it faster.
Impact of LMI on Loan Application Time
For banks with a DUA, LMI applications are usually processed within their systems, avoiding delays. Smaller lenders, however, may need to submit applications manually to the insurer, which can add about 24 hours to the approval process.
Avoiding an LMI Application
In some cases, if you don't meet specific LMI policies, a lender with a DUA can approve your application automatically. This is common with major and second-tier lenders. Smaller lenders typically require manual review by the insurer.
LMI Providers in Australia
The main LMI providers in Australia are Helia (formerly Genworth) and QBE, with some lenders using Arch, an international insurer. Some banks, like ANZ, Westpac Group, and Macquarie, also offer their own LMI internally.
Determining LMI Eligibility
LMI eligibility is complex, with policy documents not available to the public. To understand your eligibility, it is best to consult with a mortgage broker.
Alternatives If Not Approved for LMI
If you're not approved for LMI, other financial institutions may offer loans to those with a low deposit, typically at higher interest rates. Contact us at Mountain Mortgages for more information on your options.
Disclaimer: This blog is intended for informational purposes only and does not constitute financial advice. It is crucial to consider your personal circumstances and seek professional advice before taking any action. This content is protected by copyright laws and cannot be modified, reproduced, or republished without prior written consent.
