Your quick guide to LMI
2 min read
01st March 2024
Many property buyers view lender’s mortgage insurance (LMI) negatively and would rather avoid it. But while paying an LMI fee isn’t the ideal scenario, there are instances when it could benefit you.
What is LMI?
Lender’s mortgage insurance is a fee that is generally added to your home loan when your deposit is less than 20%.
When a lender issues a mortgage above 80% of the home’s value, the risk to the lender increases. LMI protects the lender from a financial loss if the borrower fails to meet their home loan commitments, the mortgage gets foreclosed and the lender can’t recoup its money by selling the borrower’s property.
LMI is a once-off, non-refundable fee paid at settlement. However, some lenders will allow you to add it to your loan.
Why was LMI introduced in Australia?
Lender’s mortgage insurance was introduced in 1965 to make homeownership accessible to more Australians.
Saving for a 20% deposit can delay purchasing a first home by five or more years. For lower-income earners, it could be longer. LMI helps first home buyers with smaller deposits access the property market much sooner.
How LMI can benefit you
You may wince at the thought of paying an LMI premium; however, there are some instances where the advantages may outweigh the disadvantages.
For example, if you want to buy in an area experiencing high capital growth, buying right now and paying LMI could end up being cheaper than taking another year to save a 20% deposit and buying into the market at a much higher price.
You can also deduct the LMI fee on your tax return, which can cushion the impact of the extra expense on your home loan.
Is LMI right for you?
The decision to enter the property market with a smaller deposit depends on several factors, including your financial position, risk profile and goals. Buying a property with LMI is not the right move for every borrower but can be very beneficial under certain circumstances. It’s helpful to consult a financial services professional who can assess your situation and help you make an informed decision.
Vie Finance & Insurance has an experienced team of credit advisors. To discuss home loan options, including the pros and cons of LMI for your personal situation, call 1300 400 843 or enquire via the link below!