The Lowdown - Lenders Mortgage Insurance

We all know how tough it is for first home buyers, especially those with a low deposit (less than 20%).

NZ has it pretty tough with the Loan to Value Ratio (LVR) rules that stick the skewer into low deposit purchases.

Australia has it's own little sadistic system of screwing the poor old low deposit purchasers. Meet your necessary evil, Lenders Mortgage Insurance (LMI).

If you are borrowing more than 80% of the purchase price of the property, chances are you will need to pay LMI.

LMI is a premium that the borrower pays to protect the bank from losses that may arise in the event that the bank is forced to sell your property for less than what you owe them. For example; you owe $500,000 and fall into serious arrears. The bank sells your home for $475,000. The insurer steps in and pays the bank the missing $25,000. Guess what happens next? Well, the insurer then comes after you for the $25,000. Yikes!

It's important to realise that LMI does not protect you, the borrower. LMI protects the bank. You have to pay the premium, but receive no protection. Nice system eh?

LMI gets more expensive the greater the loan and the higher the LVR. When you are borrowing more than 90% it really gets very uncomfortable.

Here's some examples:

Borrow $500,000. LVR 82%. LMI = c. $2,700

Borrow 500,000. LVR 88%. LMI = c. $6,300

Borrow $500,000. LVR 92%. LMI = c. $12,500

Borrow $800,000. LVR 92%. LMI = c. $28,000

You can see how it really starts to hurt. Here's handy website to run some indicative LMI calculations: https://helia.com.au/the-hub/calculators-estimators/lmi-fee-estimator

Note that LMI does vary by state and different rates are applied to owner occupied and investment property.

There are some avenues of relief though. For example, you may qualify for an LMI waiver if you are a doctor, pharmacist, registered nurse, accountant or lawyer.

The First Home Guarantee also offers a way to avoid LMI, but you need to be an Australian citizen or Permanent Resident (noting NZers on Special Category Visas are not recognised as PR's for this purpose).

As always please feel free to contact us to talk about buying a home in Australia.