Melbourne Guide: How Is Lenders Mortgage Insurance Calculated?

Understanding Lenders Mortgage Insurance (LMI) can be a bit of a puzzle. But as your mortgage broker partners with years of experience in Melbourne, we’re here to simplify things. 

LMI can add *thousands of dollars* to the cost of your home loan, so it's essential to know how it's calculated. Especially with Melbourne’s fluctuating property prices, navigating loan amounts, deposit home loans, and upfront costs can seem like a maze.

Let’s break it down, step by step, and answer the key question: How is Lenders Mortgage Insurance calculated?

What Is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a one-off payment made by homebuyers who are borrowing more than 80% of the property's purchase price. It protects the loan providers (your bank or lender) in case the borrower defaults on their loan.

It doesn’t cover you as the borrower, but it’s necessary if you don’t have a larger deposit.

Why Do You Need LMI?

If you're buying a property in Melbourne and don't have a 20% deposit, LMI will likely apply to your home loan. Lenders require this insurance because taking out a loan with a smaller deposit increases the risk of default. 

For example, on a $700,000 purchase price, a 20% deposit means putting down $140,000 upfront. But if you only have a 10% deposit ($70,000), you’ll likely be paying LMI.

How is LMI Calculated?

Lenders Mortgage Insurance (LMI) is calculated based on several key factors, including:

1. Loan Size: The total amount you’re borrowing.
2. Loan-to-Value Ratio (LVR): This is the percentage of the property’s value that you are borrowing.
3. Risk Profile: Factors like the type of loan (e.g., owner-occupied or investment property), your creditworthiness, and sometimes even your profession.

Here’s a basic formula to give you a general idea:

LMI Premium = LMI Rate × Loan Amount

The LMI Rate depends on your LVR and loan size, and is determined by the lender. The higher your LVR, the more LMI you’ll pay. Generally, LVR thresholds are:

• 80% or less: No LMI required.
• 81% to 85%: Moderate LMI rates.
• 86% to 90%: Higher LMI rates.
• 91% to 95%: Highest LMI rates.

In addition, each lender uses slightly different rate tables to calculate LMI based on their risk criteria.

The risk profile may also be influenced by factors like whether the property is for investment purposes (usually attracting higher LMI) or if you are eligible for any professional discounts (like medical professionals).

Example Calculation

Let’s break this down with a real-world example using typical Melbourne property data.

Scenario:

• Property Purchase Price: $800,000
• Deposit: 10% = $80,000
• Loan Amount: $720,000
• LVR: (Loan Amount ÷ Property Value) × 100
  LVR = ($720,000 ÷ $800,000) × 100 = 90%

Because the LVR is above 80%, LMI will apply.

Step-by-Step Example:

1. Loan Amount: $720,000 (this is how much you’re borrowing).
2. LVR: 90% (since you have a 10% deposit).
3. LMI Rate: Assuming an LMI rate of around 2% for a 90% LVR (rates vary by lender, but 2% is typical for this LVR range).

LMI Premium = 0.02 × 720,000 =$14,400 

Total LMI Cost:

Based on this calculation, the LMI Premium you’d need to pay is $14,400.

How Does This Impact Your Loan?

LMI can be paid as a one-off payment upfront, but most borrowers choose to add the LMI to their loan balance. So in this case, your new loan balance would be:

Loan Amount + LMI Premium = $720,000 + $14,400 = $734,400

This means your monthly repayments will now be calculated based on a loan of $734,400 instead of $720,000, which increases the overall amount you'll repay over the loan term.

LMI Costs in 2024: A Snapshot of Melbourne’s Property Market

Melbourne’s property market has had its ups and downs in recent years. According to data from CoreLogic, the median property price in Melbourne is around $750,000 as of 2024. If you’re borrowing 90% of that ($675,000), LMI could add anywhere from $10,000 to $20,000 to your loan. 

That’s quite a bit to add to your loan balance—and your monthly repayments! Calculators, like an LMI Calculator, can help you estimate these costs based on your loan deposit and purchase price.

LMI for Investment Properties

The rules for LMI on investment properties are usually stricter. Lenders see investment loans as riskier, which can lead to higher LMI premiums compared to residential properties. 

If you're investing in Melbourne's competitive property market, be sure to factor in the cost of LMI when assessing the viability of your investment.

Case Study: First-Time Buyers in Melbourne

Let’s look at a real-world scenario. Amy and Tom, a young couple in Melbourne, wanted to buy a home valued at $800,000. They had saved up a loan deposit of $80,000 (10%), meaning they had an LVR of 90%. 

When they sat down with their mortgage broker partner, they learned that their lenders mortgage insurance could cost between $15,000 and $22,000. The actual LMI amount varied depending on the lender they chose, as each lender has different product features and credit criteria.

By using an LMI calculator, they were able to get a more accurate estimate based on their deposit and property values. After comparing options, they opted for a lender that offered a slightly lower LMI due to their solid financial position and borrowing capacity.

How Can You Reduce LMI?

If the thought of paying thousands for LMI seems daunting, don't worry—there are several ways to reduce or even avoid it. Here are some practical tips to help lower your LMI costs:

1. Save a Larger Deposit

By saving up a 20% deposit, you can reduce your loan-to-value ratio (LVR) to 80% or less. This is the simplest way to avoid LMI altogether, which will, in turn, help lower your overall loan repayments.

A lower deposit might mean using a lenders mortgage insurance calculator to see just how much extra you’d need to budget for.

2. Shop Around for Better Rates

Not all lenders charge the same LMI premiums. Different loan providers offer a range of products with varying LMI rates, so it's wise to use comparison tools or speak to a mortgage broker to get professional financial advice.

A broker can help you find a loan with a favourable comparison rate that suits your budget.

3. Professional Discounts for Medical Practitioners

Some professions, such as medical practitioners, may qualify for LMI waivers or discounts. Certain lenders offer special rates based on your annual income and professional status. These financial products can help you save significantly on your LMI costs.

4. Use a Family Guarantee

Don’t have a 20% deposit? Some lenders allow family members, typically parents, to use their home's equity as a security guarantee for your loan.

This can eliminate the need for LMI while helping you meet your stamp duty and other upfront costs without the stress of taking out personal loans.

5. First Home Loan Deposit Scheme (FHLDS)

For eligible first-home buyers, the Australian government offers the First Home Loan Deposit Scheme (FHLDS). Under this scheme, you can buy a home with as little as a 5% deposit and avoid paying LMI.

It's important to review the type of insurance and product coverage offered under this scheme to ensure it suits your repayment type and financial goals.

Remember, every financial product and loan type will have its own product coverage and terms. Be sure to review your outstanding loan obligations and calculate your loan repayments carefully before making any final decisions.

FAQs

Can I avoid paying LMI?

Yes, you can avoid LMI by saving a 20% deposit, getting a family guarantee, or checking if you're eligible for government schemes like the First Home Loan Deposit Scheme.

Is LMI a one-off payment?

Yes, LMI is a one-off payment typically made when you settle your loan, although it can be added to your loan balance.

How do I know if I need LMI?

If your LVR is above 80%, you’ll likely need LMI. Use an LMI calculator to check.

Is LMI tax-deductible?

For investment properties, LMI can be tax deductible. Check with your financial advisor for details.

Does LMI cover me if I can't make repayments?

No, LMI protects the lender, not you. It doesn’t help if you can't make your mortgage repayments.

Can LMI be refunded?

In some cases, if you pay off your loan or refinance within the first few years, you may be eligible for a partial refund of your LMI.

Conclusion: Take the Next Step

Navigating LMI can be tricky, but with the right knowledge and support, you can make smarter financial decisions. Remember, the goal is to get the best possible loan terms that suit your personal circumstances—and we're here to help.

For more information or assistance with your loan journey, give LM Connect a call at 0423 713 362 or visit www.lmconnect.com.au. Let's ensure you're well-prepared for every step of your property purchase!