What is LMI when it comes to a home loan?

Lenders Mortgage Insurance (LMI) is a term you will come across when applying for a home loan. 

What is LMI?

LMI is an insurance premium that helps to protect lenders against losses which may be incurred if a borrower is unable to repay their loan. How much LMI depends on your loan to value ratio and can be calculated by your lender when you apply for a home loan. For loans with more than 80% loan to value ratio (LVR) with Heritage Bank you will be required to pay LMI.

How can I avoid paying LMI?

The best way to avoid paying LMI is to decrease your Loan to Value Ratio by:

1. Saving a bigger amount for a deposit: and/or
2. Tightening your budget when it comes to finding a property to purchase.

If you want to save more for a deposit there are lots of ways to do so; from revising your household budget, to saving on everyday purchases, and by keeping your money in a high interest savings account.

The way you structure your loan can also help to reduce your LVR. For example, you may be able to use equity in an existing property to increase your deposit amount. The bigger deposit you have, the smaller your mortgage will be, which will affect your LVR.

Another option to consider is taking advantage of a guarantor option, such as the Heritage Family Guarantee loan. This loan allows immediate family members to help you purchase a home without them having to provide cash as an upfront deposit. Instead, the bank takes a mortgage over the guarantor’s property which is used as equity to assist with purchasing the new property. The maximum LVR for the primary loan is 80% and 70% against the guarantor’s security. These LVR restrictions not only help to ensure we are lending responsibly but it also means there is no need to pay lender’s mortgage insurance. An LVR under 80% generally attracts better interest rates.

So, what does this mean for my home loan?

It’s important to understand whether you'll need to pay LMI before you apply for a home loan. This will help you to understand what costs are contributing to your loan repayments and what interest rate you'll be charged.