The lender will pay the LMI premium to the insurer when liquidating the purchase of your home. This one-time upfront payment covers the lender for the life of the loan (which can be up to 30 years). The amount of the LMI premium depends on the lender, how much it lends to you and the amount of your deposit. The LMI premium is a single, non-refundable fee that is paid at the time the loan is liquidated.
For most lenders, the LMI fee can be included in the loan amount. If the LMI is added to the amount of the mortgage loan, the borrower will pay interest on the total loan and increase the minimum monthly repayments on the loan. The LMI allows the lender to trust in offering you a mortgage loan, even if you haven't reached that 20% deposit. Your guarantor can help by providing additional security that reduces the LVR to 80% and thus allows you to avoid paying the LMI.
The real purpose of the LMI is to protect and potentially benefit the lender, according to the financial comparison website Canstar. Your mortgage broker will be able to identify not only how likely it is that the LMI will be approved, but also how long the application may take. LMI is insurance that lenders take out to be able to lend to borrowers who have a lower deposit (that is, generally when the amount lent exceeds 80% of the value of the property). The cost of the LMI may vary depending on the percentage of the value of the property borrowed and the amount of the loan.
In this case, if your deposit isn't big enough, you can decide to pay the LMI so you can buy your first home sooner. Meanwhile, the Insurance Council of Australia (ICA) describes the LMI as “an important component of the Australian housing market. Smaller deposits mean greater risk for lenders, so the LMI allows Australians to borrow more without lenders assuming the risk on their own. Even if your loan-to-value ratio (LVR) is higher than 80%, you could be exempt from your LMI if you meet some specific conditions.
The LMI can represent an important part of your mortgage loan, and if you need to absorb this cost in the loan, you may need to evaluate your target budgets for buying your home. The amount of LMI you pay will depend on how much you borrow, the size of the deposit and the lender, but it will most likely amount to several thousand dollars. For each new loan, the lender will analyze the relationship between the loan and the value and will generally be required to pay the LMI if your LVR is considered to be high-risk. Sometimes, a combination of other factors can also cause the LMI to be exempted from the mortgage loan, such as having a perfect credit history and applying for a modest loan amount for a property in a low-risk suburb.
When talking to lenders about the possibility of obtaining a home loan, be sure to ask how they calculate the LMI and what the estimated cost may be.
