Lenders Mortgage Insurance or LMI is an insurance required by most lenders for loans over over 80% Loan to Value Ratio (LVR). 

Borrowing over 80% of your property value requires Lenders Mortgage Insurance. 

This is a one-off insurance that protects the lender in the case that you default on your mortgage.  If a bank sale is required on your home, they may not be able to achieve a full price sale, therefore the insurance will recover their losses. Loans over 80% are deemed higher risk and for this purpose insurance is required.

How to avoid Lenders Mortgage Insurance: 

2 factors contribute to the need for Lenders Mortgage Insurance, first your total deposit ( Total Deposit = Cash deposit + Stamps + Fees) and second the LENDERS valuation of the property. 

  • Usually, you are required to have a minimum of 5-10% of the purchase price however loans an 80% LVR or lower will avoid Lenders Mortgage Insurance.
  • Most lenders also require buyers to have genuine savings, if your buying over 80%. Showing you are able to be responsible with your finances and the risk of default is low. This is proven through your bank statements for 3-6 months of historical transaction. To prove genuine savings, your must have the funds in your account for 3- 6 months. If you're drawing down on your saving in that time, it will reflect that your savings are not savings, rather money you require for every day expenses. Not all lenders require this, however most do. 
  • If a family member gifts you the deposit funds, you are required to show a “gift letter”. This gives the bank certainty that the money gifted doesn’t have any informal loan arrangement between you and the family member.
  • Clients can also opt for a guarantor loan, which utilities a family members property equity to cross collateralize against your new purchase and will avoid Lenders Mortgage Insurance. 

For example: If you purchase a new home for $500,000 then your deposit to secure a loan at 80% and avoid Lender Mortgage Insurance will be $100,000. If your parents’ home is valued at $800,000 then the lender can hold your title for your parents’ home as well as your title home. This provides a sufficient security for the lender to allow you to avoid paying some physical cash towards your purchase.