How is LMI Calculated? | A Guide on How to Calculate

If you’re looking to buy a home. then understanding how to calculate Lenders Mortgage Insurance (LMI) is very important .

LMI is a type of insurance that protects lenders in case a borrower defaults on their home loan. This guide will walk you through what LMI is, how it is calculated, and how you can use an LMI calculator to find out what you may have to pay.

By the end of this article, you will have a clearer understanding of LMI and its implications for your home buying journey.

What is Lenders Mortgage Insurance (LMI) and Why Do You Need to Pay for It?

Lenders Mortgage Insurance (LMI), also known as mortgage protection insurance, is a policy that lenders take out to protect themselves against the risk of loss if a borrower defaults on their home loan. It is particularly relevant for borrowers who have a deposit of less than 20% of the property’s value, which results in a higher loan-to-value ratio (LVR).

The purpose of LMI is to mitigate the financial risk associated with lending money to individuals who may not have a substantial deposit.

Without LMI, lenders may be less inclined to offer loans to borrowers who do not meet the 20% deposit threshold.

If you are borrowing more than 80% of the value of the property, you will need to pay LMI. This is a common requirement set by lenders to safeguard their investment.

Even if you have a strong credit history and a reliable income, if your deposit is less than 20%, you may have to pay for LMI.

While paying for LMI may seem like an additional expense, it offers several benefits. Firstly, LMI allows you to enter the property market sooner, as it enables you to buy a home with a smaller deposit.

This can be especially beneficial in a rising property market, where waiting to save a larger deposit may result in higher home prices.

Secondly, having LMI can make you a more attractive borrower to lenders, as it reduces their risk, potentially leading to better loan terms and lower interest rates.

How is LMI Calculated? A Step-by-Step Guide

Here’s a step-by-step guide on how LMI is calculated:

Determine your Loan to Value Ratio (LVR)

Your LVR is the percentage of the property value you are borrowing. For example, if you are borrowing $450,000 for a property worth $500,000, your LVR is 90%.

Find your LMI rate based on your LVR

Use an LMI premium table to find the applicable rate for your LVR. For example, for a 90% LVR, the LMI rate may be around 2.4%.

Calculate your LMI premium

Multiply your LMI rate by your loan amount. For example, for a $450,000 loan at 2.4%, the LMI premium is $10,800.

Add stamp duty on LMI

You may also need to pay stamp duty on the LMI premium, which varies by state.

Pay the LMI premium

You can pay the LMI premium as an upfront cost during settlement or add it to your loan amount, increasing your monthly repayments.

For example, if you are buying a $500,000 property with a $50,000 deposit (10%), your LMI premium may be around $10,800 plus $1,080 in stamp duty. You can pay this $11,880 upfront or add it to your $450,000 loan, making your total loan amount $461,880.

What is the LMI Cost Based on Your Loan Amount?

The LMI premium structure can vary widely depending on the lender and the specifics of the loan. Typically, the LMI fee is calculated as a percentage of the total loan amount. For instance, the LMI cost may increase as your loan amount rises or if your LVR exceeds 80%. Understanding this structure is vital, as it allows you to anticipate the total costs associated with your home loan and prepare your budget accordingly.

Your loan amount and LVR directly impact how much LMI you will have to pay. For example, if you are purchasing a property worth $500,000 with a deposit of $50,000, your loan amount would be $450,000, resulting in an LVR of 90%. In this scenario, you would be subject to a higher LMI cost than if your LVR were 80% or less.

To calculate your estimated LMI fee, you can use an LMI calculator, or you can refer to your lender’s LMI premium table.

By inputting your loan amount and deposit size, the calculator will provide you with an estimated LMI fee. For instance, if your loan amount is $400,000 and your LVR is 90%, the estimated LMI cost could be several thousand dollars.

Knowing this information ahead of time can help you make informed decisions about your finances and whether you need to adjust your deposit or loan amount.

Tips You Should Consider to Avoid Paying LMI

One of the most effective strategies to avoid paying LMI is to increase your deposit. By saving a larger deposit, you can lower your LVR to below 80%, which typically eliminates the need to pay for LMI.

This strategy not only helps you avoid the additional cost of LMI but can also result in more favourable loan terms and lower interest rates. Even if it takes time to save, the long-term financial benefits can make this approach worthwhile.

Another way to potentially avoid paying LMI is by exploring LMI waivers or alternatives. Some lenders may offer LMI waivers for specific demographics, such as first-time home buyers or professionals in certain fields.

You may be able to negotiate with your lender for a lower LMI fee or look for lenders with more favourable LMI policies. Engaging with a mortgage broker can also help uncover options that you may not be aware of.

How Does LMI Relate to Other Costs Like Stamp Duty?

Stamp duty is another significant cost that home buyers need to be aware of. It is a tax imposed by the state or territory government on property purchases, calculated as a percentage of the property’s price. The amount of stamp duty you will need to pay varies depending on the value of the property and the specific regulations in your location.

To calculate your total costs, you should consider how stamp duty, GST, and LMI interact. In many instances, LMI can be included in the total loan amount, while stamp duty is calculated separately. Using an online stamp duty calculator can help you estimate both costs quickly.

Finally, when planning to buy a home, budget for all associated costs: LMI, stamp duty, and other fees such as legal costs, inspections, and ongoing expenses like loan repayments.

By creating a detailed budget that includes these factors, you can ensure you are financially prepared for home ownership.

Conclusion

LMI is calculated based on your Loan to Value Ratio (LVR). The higher your LVR, the higher your LMI premium will be.

To calculate your LMI, you need to find your LVR, look up the applicable LMI rate, multiply it by your loan amount, and add any stamp duty. You can pay the LMI premium upfront or add it to your loan amount.

Knowing how to calculate LMI can help you budget for your home loan and make informed decisions about your borrowing capacity. By understanding the factors that influence LMI, you can work with your lender to find the best loan option for your needs and financial situation.

FAQS

How can I calculate LMI for a home loan?

Lenders Mortgage Insurance (LMI) is calculated based on the size of your deposit and the percentage of the loan amount you are borrowing. If you are borrowing more than 80% of the property value and have a deposit of less than 20%, you will typically need to pay for LMI.

What is an LMI calculator, and how do I use it?

An LMI calculator is a tool that helps you estimate the cost of lenders mortgage insurance based on your loan amount, deposit size, and property value. You can use our lenders mortgage insurance calculator to calculate how much LMI you may need.

Can I get a refund on my LMI?

Yes, you may be eligible for an LMI refund if you pay off your loan in full or if you refinance within a certain timeframe. It’s best to check with your lender for specific policies regarding LMI refunds

How much LMI might I need to pay?

The cost of the LMI can vary widely depending on the lender, the size of your loan, and the percentage of your deposit. Generally, the greater the loan amount and the smaller the deposit, the more LMI you might have to pay.

Are there ways to avoid paying LMI?

Yes, you can avoid LMI by having a deposit of 20% or more of the property value. Some lenders may also waive LMI if you have a guarantor or if you are eligible for certain first-home buyer schemes.

What is the relationship between LMI and stamp duty and GST?

LMI is a separate expense from stamp duty and GST, which are taxes associated with the purchase of a property. However, when calculating your overall home loan costs, you should consider all these expenses together.

How does the size of my deposit affect my LMI?

The size of your deposit directly impacts your LMI costs; the less deposit you have (less than 20%), the higher your LMI expense will be. Conversely, a larger deposit can reduce or eliminate the need for mortgage protection insurance.

Is LMI the same as mortgage protection insurance?

No, lenders mortgage insurance (LMI) protects the lender in case you default on your loan, while mortgage protection insurance covers your loan payments in the event of your death or disability. They serve different purposes and should not be confused.

Do I still need to pay stamp duty if I am paying LMI?

When buying a property, if your loan balance is less than 20 percent of the property value, you may have to pay lender’s mortgage insurance (LMI).

If you’re borrowing more than 80 percent, LMI can be paid upfront, and the cost of your LMI can be significant. However, some lenders may offer discounts or even waive LMI depending on your situation.

While stamp duty is payable on property purchases, it is separate from LMI costs. You will still pay interest on your loan, and it’s essential to calculate mortgage insurance alongside other expenses.