Lenders Mortgage Insurance otherwise known as LMI is an insurance policy taken out by lenders on a mortgage when the loan exceeds a certain ratio. In Australia, mortgage insurance is paid on full doc loans over 80% LVR, and is paid on low doc loans over 60% LVR. There are some minor exceptions to this rule depending on the lender and product.
Lenders Mortgage Insurance has its origins in the US in the later part of the 1800âs and gained in popularity with mortgage lenders in the mid 1900âs.
Mortgage insurance emerged in Australia in the late 1970âs and early 1980âs when first introduced by the major banks, credit unions and building societies. In 2012, Australia has over 50 different mortgage lenders operating with at least 5 different mortgage insurance underwriters.
Lenders Mortgage Insurance is an insurance policy on the mortgage protecting the lender in the event of possible loss. This loss can arise from foreclosure sale of a property whereby the sale proceeds are insufficient enough to cover the amount owed on the mortgage. In the event of a mortgage insurance claim, the lender recovers their money from the mortgage insurer which had insured the loan itself.
Lenders Mortgage Insurance should not be confused with mortgage protection insurance which protects the borrowerâs ability to repay his/her loan in the event of hardship or illness.
Mortgage insurance cost is calculated using a sliding scale based on LVR and loan amount. Further, mortgage insurance factors in possible location, whether the loan is regulated or non regulated, and possible first home buyer benefits. The latter is not always applicable but is at times relevant depending on the lender.
As mentioned above, LMI is calculated using a sliding scale table. The LVR, loan amount and borrowerâs position is considered.
The table below and example will give you an idea of how LMI is calculated:
Base LVR Bands
|$0 – $300,000||$300,001 – $500,000||$500,001 – $750,000||$750,001 – $1,000,000||$1,000,001 – $1,500,000|
|80% – 82.99%||0.46%||0.62%||0.99%||0.98%||1.11%|
|83.00 – 85.99%||0.65%||0.91%||1.46%||1.47%||1.63%|
|86.00 – 89.99%||0.88%||1.46%||1.82%||1.93%||2.42%|
|90.00 – 91.99%||1.64%||2.01%||3.30%||3.46%||3.89%|
|92.00 – 93.50%||1.76%||2.12%||3.51%||3.59%||4.05%|
|93.51 – 94.99%||1.95%||2.58%||3.78%||3.96%||4.38%|
|95.00 – 97.00%||2.31%||2.89%||3.93%||3.99%||4.53%|
If for example we had a borrower looking at borrowing $525,000 at 92.4%LVR, then calculation will be as follows to determine the LMI cost:
$525,000 x 3.51%
You can compare the cost of LMI by talking to one of our brokers who can give you an accurate guide to the cost of LMI. Our brokers can explain which lenders use different LMI providers, and the difference in charges between various lenderâs LMI. To give yourself an idea of what LMI costs, we invite you use our comparison LMI calculator.
Different lenders use different LMI providers. Further, lenders at times have different LMI table costs depending on their agreement with the LMI provider. Hence it is possible to be charged different LMI cost by different lenders even though the same LMI provider is being used.
Not all lenders have the same LMI charges. Different lenders use separate LMI providers with different rate cards. Some lenders even have their own mortgage insurance company which is owned by themselves. Some lenders will offer a risk fee instead of LMI. In this case, you will find that this could be significantly cheaper than LMI.
There are approximately 5 different lenders mortgage insurance providers in Australia. These mortgage insurance providers can be either external insurance companies or subsidiaries of different lenders. The lenders mortgage insurers are:
The main mortgage lenders insurance providers in Australia are Genworth and QBE who account for more than 60% of the total mortgages insured in Australia. Further, both Genworth and QBE re-insure some of the 3 owned bank mortgage insurance providers under different underwriting policy agreements.
With most insurance policies in Australia including LMI, state and federal government taxes are applied to the premium. These include stamp duty and GST based on the amount or premium being applied to the loan if it is insured.
The stamp duty payable for different states are as follows:
Obviously the federal government GST applicable on the premium will also be 10% of the premium.
Lenders Mortgage Insurance is a vital part of the mortgage and home loan market in Australia. When looking at taking out a mortgage home loan, itâs best to speak to a Mortgage Providers broker to understand which lenders will meet your needs. This conversation will help you also understand which Lenders Mortgage Insurance (LMI) provider is the cheapest for your particular position. This phone call will definitely save you thousands.