Do I Need Lenders Mortgage Insurance?

1 December, 2020
Are you saving for a deposit on a house and wondering what the magic figure is?

CWCU accepts a 5% deposit in some circumstances, but we advise our clients to aim for 10%, to reduce interest payments. 

But if we’re really looking for a magic number - a 20% deposit means you can borrow without needing Lenders Mortgage Insurance.
 

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) protects the lender in the event you default
on your home loan (and the property sale isn’t high enough to cover what your debt.)

When LMI is required, you’ll have to pay the insurance premium. 
 

Who needs Lenders Mortgage Insurance?

Whether or not you need Lenders Mortgage Insurance depends on the Loan to Value Ratio.

When taking out a home loan, the lender will make an assessment of the property's market value. 

The LVR is calculated by dividing the loan amount by the market value of the property.

If your deposit is less than 20% of the lender-assessed value, it means you have a Loan to Value Ratio of more than 80%.

This is generally when Lenders Mortgage Insurance is needed.

However - CWCU has different rules about when LMI is required. When you apply for a home loan, our loans staff will help you determine this.
 

How much does Lenders Mortgage Insurance cost?

The cost will depend on several factors:
  • The LVR - the higher the LVR, the higher the cost of LMI
  • The size of your loan - the more money you are borrowing, the greater the potential loss to the financial institution. This generally means the larger your loan, the higher the cost of LMI.
  • The location of the property 
 

How can I avoid Lenders Mortgage Insurance?

There are a couple of ways you can avoid paying LMI.

Without stating the obvious, a deposit of 20% or more of the lender’s valuation of the property will save you having to take out insurance. With this in mind, it might be worth considering the advantages and disadvantages of giving yourself more time to save. 

Another way to get around LMI is by having a guarantor on your loan.

This is someone who ‘guarantees’ part of your loan, so that in the event of a default, after your property has been sold, the responsibility falls to them. 

This reduces the risk for the lender, but it does place the risk on the guarantor. This decision should therefore not be taken lightly. 
 

Want more information?

Our Loans Staff would be very happy to sit down (in person or via phone/teleconference) to walk you through Lenders Mortgage Insurance and the loans process. 

Get in touch if you have any questions.