Understanding Lenders Mortgage Insurance (LMI)
If you're buying your first home with less than a 20% deposit, you might come across something called Lenders Mortgage Insurance, or LMI. It’s a term that can raise questions, so let’s break it down.
What is LMI?
Lenders Mortgage Insurance is a one-off insurance premium that protects the lender - not the buyer - if you're unable to repay your home loan. It typically applies when your deposit is less than 20% of the property's value. While it's an added cost, LMI can help you enter the property market sooner, without needing to save the full 20% deposit.
An example: Ivana and Vijith
Let's look at how this works in practice.
Ivana and Vijith are buying their first home in Victoria for $750,000. They've saved $75,000, which is a 10% deposit.
To avoid paying LMI, they'd need a $150,000 deposit - double what they currently have. Based on their situation, their estimated LMI cost would be around $17,000.
What are their options?
Option 1: Save more to avoid LMI
Ivana and Vijith could continue saving to reach the 20% deposit. But how long would that take?
- Saving $500/month = 12.5 years
- Saving $1,000/month = 6.25 years
That’s a long time - and in that period, property prices may rise, making it even harder to catch up.
Option 2: Pay LMI upfront
They could choose to pay the $17,000 LMI upfront at settlement. This keeps their loan smaller but requires more cash on hand now.
Option 3: Add LMI to the loan
Alternatively, they could add the LMI to their loan, increasing it to $692,000. This would mean an extra repayment of around $47/month.
Benefits of this approach:
- Buy now, no extra savings needed
- Spread the cost over time
- Keep moving forward with their homeownership goals
A final tip
Remember, LMI protects the lender. It’s wise to explore other types of insurance that protect your income, your home, and your ability to repay the loan. We always recommend seeking independent advice to understand what cover is right for you.
Ready to take the next step?
At BankVic, you may be eligible to borrow up to 90% LVR and not have to purchase LMI. Terms and conditions apply. Reach out to our BankVic Home Loan Mentors to help you find out if you’re eligible and explore you options to make confident decisions during your first home buying journey.
We’re here to help
If you have any questions about buying your first home, visit www.bankvic.com.au/home-buying/first-home-buying, call 13 63 73 or book an appointment with a Home Loan Mentor by visiting www.bankvic.com.au/book-appointment.
