Trying to save enough money to avoid Lenders Mortgage Insurance (LMI) is a great idea – why pay extra money for no reason if you can avoid it? But how much do you really need to avoid LMI?
Lenders Mortgage Insurance is a fee charged by home loan lenders to protect them in the event the borrower is unable to repay the loan. To be clear, it’s important to note that LMI only protects the lender – if the borrower defaults on the loan, they are still liable for the full loan amount.
LMI is typically charged when the borrower has a deposit that’s less than 20% of the value of the property, which may not necessarily be the same as the purchase price. The cost of LMI varies from bank to bank and depends on the amount borrowed, but can range from less than $1,000 to well in excess of $10,000.
LMI is paid at the time of settlement and can often be added (capitalised) onto your loan. It’s estimated that around one quarter of all loans in Australia have LMI.
Loan to Value Ratio
Banks will use the Loan to Value Ratio (LVR) to determine if you need to pay LMI or not. LVR is the loan amount divided by the property value.
For example, a $300,00 loan used to purchase a house valued at $500,000 would have a LVR of 60%.
Usually, the maximum LVR you can have without paying LMI is 80% for full document loans and 60% for low document loans. Any more than this, and the banks will require the borrower to have LMI.
LMI will vary from bank to bank, but you can use the following table to give you an estimate of the LMI payable for various loan amounts and Loan to Value Ratios.
|LVR||Up to $300K||$300K – $500K||$500K – $600K||$600K – $750K||$750 – $1M|
|80.01 – 81%||0.45%||0.54%||0.89%||0.93%||0.93%|
|81.01 – 82%||0.48%||0.54%||0.89%||0.93%||0.93%|
|82.01 – 83%||0.49%||0.57%||0.92%||1.07%||1.13%|
|83.01 – 84%||0.62%||0.80%||0.92%||1.07%||1.13%|
|84.01 – 85%||0.65%||0.86%||1.15%||1.32%||1.39%|
|85.01 – 86%||0.83%||1.00%||1.15%||1.32%||1.39%|
|86.01 – 87%||0.83%||1.01%||1.39%||1.60%||1.69%|
|87.01 – 88%||0.99%||1.27%||1.39%||1.60%||1.69%|
|88.01 – 89%||0.99%||1.37%||1.92%||2.18%||2.29%|
|89.01 – 90%||1.31%||1.72%||1.92%||2.18%||2.29%|
|90.01 – 91%||1.97%||2.58%||3.03%||3.58%||3.69%|
|91.01 – 92%||1.97%||2.64%||3.03%||3.58%||3.69%|
|92.01 – 93%||2.23%||2.98%||3.40%||3.78%||4.09%|
|93.01 – 94%||2.23%||2.98%||3.40%||4.03%||4.09%|
|94.01 – 95%||2.47%||3.30%||3.40%||4.37%||4.58%|
So you want to purchase a house for $500,000 and want to avoid LMI. Therefore you need a deposit of $100,00 right? Nope, not quite. While it’s true that if you borrowed $400,000, your LVR would be 80% and you’d avoid LMI, there are a number of other fees and charges that will tip you over the limit. Let’s have a look:
Property Value: $500,000
Fees and charges:
- Stamp Duty (VIC): $21,970
- Government Fees: $1,376
- Conveyancer: $2,000
- Total: $25,346
Total Required: $525,346
Loan Required: $425,346
Because the LVR is above 80%, the bank will require LMI to be paid.
Impact of LMI
Now let’s have a look at the impact of LMI in the above example. You currently have $100,000, and with the total purchase price including fees of $525,346, you have a LVR of 85%. To get to a LVR of 80% and avoid LMI, you will need an additional $5,069.
So how could you get this additional money? An obvious way would be to save more. But this takes time and isn’t always necessarily possible or even the best decision.
If you’re thinking about waiting to save more money to avoid LMI, you need to take into account the amount of time it will take and the relevant impact on your purchase price (check out our Pay Calculator to estimate your take-home pay). Depending on the current state of the market and location you are looking in, a wait of even a few months could result in the market price increasing far in excess of any savings you would get by avoiding LMI.
For example, in a market that is experiencing growth at 8% per year, a $500,000 property would increase on average around $3,300 per month. An increase at this rate can quickly outweigh and actually cost more than purchasing earlier and paying LMI.
So if you have easy access to additional funds, it’s a great idea to top up your deposit to avoid LMI. But if the market is hot and you need a number of months to save your money, then the rate you can save will likely be slower that the capital growth of any property you purchase. If that’s the case, the quicker you buy the better.
How Else to Avoid LMI
Another option you can consider is having someone act as guarantor for you loan. In this arrangement, the loan is guaranteed via collateral that the guarantor puts up (usually the guarantor’s property).
This increases the amount of equity to reach a LVR of 80%, thus avoiding LMI However; this comes with some potential downsides. In the event the borrower defaults on the loan, the guarantor will be liable for at least a portion of the loan. It also can make things difficult if the guarantor wants to sell the property or use their equity in the future. These sorts of things can put serious strains on relationships so it may not be worth entering into an arrangement like this for the sake of saving a few thousand dollars.
Don’t Forget the Fees
Basically, when estimating how much deposit you need, don’t forget to add in the fees! Then, keep in mind that while it’s not optimal to pay LMI, for your given situation it may actually be the key to getting into the market when you want, for the price you want.
As always, before you make any decisions, make you consider how all of the various options could impact your situation.