Lenders Mortgage Insurance: LMI Costs, Benefits and Refunds

Lenders mortgage insurance protects the lender, not you. When you borrow more than 80% of a property's value, most lenders require LMI to cover their risk if you default and the property sale doesn't cover the full loan amount.

LMI is a one-off premium that gets you into the property market sooner with a smaller deposit. Here's what every borrower needs to know about how it works, what it costs, and when you might get some of it back.

What Is Lenders Mortgage Insurance?

Lenders mortgage insurance is a policy the lender takes out with an insurance provider. The policy covers the lender's potential loss if you default on your loan and the property sale proceeds don't cover the outstanding balance.

Most lenders require LMI when your loan-to-value ratio exceeds 80%. If you're buying a $600,000 property with a $100,000 deposit, your LVR is 83%. This 3% over the 80% threshold triggers the LMI requirement.

The insurance doesn't protect you. If you default, the insurer pays the lender's shortfall, then typically pursues you for recovery of that amount. You remain liable for the full debt even after the property is sold.

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LMI Cost Breakdown

LMI premiums vary based on your loan amount, deposit size, and lender. The higher your LVR, the higher the premium.

Typical LMI costs on a $500,000 loan:

• 85% LVR ($75,000 deposit): $3,500-$5,500
• 90% LVR ($50,000 deposit): $7,500-$11,000
• 95% LVR ($25,000 deposit): $15,000-$20,000

Fees and rates vary by lender and are subject to change. Confirm current pricing with your mortgage broker.

You can pay the LMI premium upfront at settlement or capitalise it into your loan. Capitalising means adding the premium to your loan amount, which increases your monthly repayments and the total interest paid over the loan term.

On a $500,000 loan at 6% over 30 years, capitalising a $10,000 LMI premium adds roughly $60 to your monthly repayments and $21,600 in additional interest over the life of the loan.

LMI Benefits for Borrowers

LMI enables lenders to offer loans to borrowers with deposits below 20% who otherwise meet their credit requirements. Without LMI, many lenders would cap lending at 80% LVR.

This means you can:

• Enter the property market sooner with a 5-10% deposit
• Stop paying rent while saving for a larger deposit
• Take advantage of market conditions when you find the right property

You need to weigh the LMI premium against continued rent payments and potential property price movements while you save a larger deposit, considering the additional cost involved.

LMI Refund Conditions

Some lenders offer partial LMI refunds if you pay out your loan early, typically within the first two years. Refund arrangements vary by lender and LMI provider, and are subject to individual assessment.

Common refund scenarios:

• Refinancing within 12 months: May provide 40-60% refund
• Refinancing within 24 months: May provide 20-40% refund
• After 24 months: Usually no refund available

If you're considering refinancing soon after settlement, factor potential LMI refunds into your calculations. Your mortgage broker can check refund policies with your current lender before you make any decisions.

LMI and Refinancing

LMI policies are lender-specific. If you refinance to a different lender and your LVR still exceeds 80%, you'll pay LMI again with the new lender.

This creates a refinancing cost that can offset interest rate savings. On a $400,000 loan with 85% LVR, paying LMI twice might cost $7,000-$10,000 in additional premiums.

However, property value growth or loan principal reduction might bring your LVR below 80% by refinancing time. If your property has increased in value or you've paid down your loan balance sufficiently, you may refinance without triggering new LMI requirements.

LVR limits vary by lender and are subject to individual assessment.

Property Default and LMI Claims

If you default and the lender sells the property, LMI covers the shortfall between the sale price and outstanding loan balance. The process typically works like this:

1. Lender attempts to recover missed payments through standard procedures

2. If unsuccessful, lender initiates possession proceedings

3. Property is sold, often at mortgagee auction

4. If sale proceeds don't cover the debt, lender claims against LMI policy

5. LMI insurer pays the lender's claim

6. Insurer pursues the borrower for recovery of the amount paid

You remain legally liable for any shortfall amount, even after losing the property. LMI protects the lender's position, not yours.

Mortgage Protection vs LMI

Lenders mortgage insurance covers the lender's risk, not your ability to make repayments. If you become unemployed or disabled, LMI won't help with your mortgage repayments.

Mortgage protection insurance is separate cover that can help with your repayments if you can't work due to illness, injury, or unemployment. This protects your ability to stay in your home during temporary financial hardship.

Discuss both types of insurance with a qualified mortgage broker to understand which protection suits your circumstances.

Case Study: LMI in Action

Sarah finds a $500,000 unit with a $50,000 deposit (90% LVR). Her lender requires LMI, adding approximately $8,500 to her costs, subject to lender assessment.

She chooses to capitalise the LMI, increasing her loan to $458,500. At 6% over 30 years, her monthly repayments are $2,749 instead of $2,698 - an extra $51 per month.

Two years later, the property is worth $550,000 and her loan balance is $440,000. Her LVR has dropped to 80%, so when she refinances for a better rate, she avoids paying LMI again.

The LMI cost was $8,500 upfront but enabled her to buy two years earlier. During those two years, she paid $24,000 less in rent than mortgage repayments would have been, and benefited from $50,000 in property value growth, though outcomes can vary based on individual circumstances and market conditions.

Key Choice Lending has access to 72+ lenders and has supported Australian borrowers through more than $1 billion in transactions. Founder Matthew Clark is a two-time Amazon bestselling author and Better Business Award winner.

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