Finance

How to Avoid Paying for Lenders Mortgage Insurance Twice

By Nell Matzen  |  15 Feb, 2021

Lenders Mortgage Insurance (LMI) is one of the more significant upfront costs involved in buying a property. In certain circumstances, you may be required to pay LMI when refinancing your home loan. Unfortunately, LMI is lender specific and not portable between loans, so, just like when you applied for your original mortgage, if you are borrowing more than 80% of the price of the property, you will be required to pay it.

If you’re refinancing to save money, having to pay LMI again can add up to tens of thousands of dollars, taking a large chunk out of your potential savings.

To help make the most of refinancing, we’ve outlined how you can avoid paying lender’s mortgage insurance twice.

Here’s an example:

  • You buy a house worth $700,000 and you have a 5% deposit = $35,000
  • You therefore borrow 95% = $665,000
  • Your LMI cost (estimate) = $29,990

What is LMI?

LMI is an insurance policy that protects the lender if the mortgage holder defaults on the mortgage. The payment covers any losses that the lender may incur if the mortgage holder can no longer make their repayments. LMI only applies for loans with less than 20% deposit, as lenders consider anyone who falls into this category higher-risk, and more likely to default on their loan.

It can also apply to people who are self-employed, due to their potentially inconsistent income stream. It’s not unheard of for self-employed borrowers to require a 40% deposit to avoid paying LMI.

Although it might seem like a scary concept, LMI is generally a positive thing. It allows potential borrowers to get into their own home faster than if they were to save up a 20% deposit – or 40% for some. In the current property market, saving 20% of the cost of a property, at the same time as paying rent, can take several years. And with property prices rising fast, the goalposts are moving quickly.

Remember, LMI is different from mortgage protection insurance. LMI is there to protect the lender, and the latter is to protect the mortgage holder if they become incapacitated or seriously ill and can’t make their repayments.

Read more: Understanding Lenders’ Mortgage Insurance (LMI)

The risks of LMI

LMI might be a way to get into a house sooner rather than later; however, there are some potential risks.

The smaller the deposit, the bigger the loan – meaning greater repayments. You may be moving closer to your property goals, but it could potentially result in a hard to manage mortgage and limited cash flow. It might be tempting to use LMI as a shortcut to purchase a more expensive home, but that too could potentially lead to financial issues in the future.

When deciding if you’re going down the LMI route, firstly make sure that you can comfortably make your repayments.

How do you pay for LMI?

There are two ways to pay LMI. Unlike stamp duty, you can add it to the mortgage. Borrowing the LMI along with the cost of the property, or capitalising’ it, means you will be paying it off over the life of the loan. It’s important to remember, if LMI is included in the loan, it will also accrue interest, meaning it will cost more in the long run.

The second and most common way to pay LMI is upfront.

How to avoid paying for LMI twice

When it comes to refinancing, just like when you took out your first mortgage, if you don’t have a 20% deposit or 20% equity in your home, you will be required to pay LMI.

1. Wait for 20% equity

It might be easier said than done, but simply waiting until you have 20% equity in your property means you’ll avoid paying LMI twice.

Read more: How much equity do you need to refinance?

2. Save up

If you want to reap the benefits of refinancing sooner rather than later, dipping into your savings account could also help you avoid paying LMI twice. It’s not necessary to save up the entirety of 20% of the loan amount, as it’s possible to use a combination of equity and savings to reach the magic number – 20%.

3. Buy in partnership with someone

If you aim to get on the property ladder sooner and you don’t have a 20% deposit on your own, you could potentially partner with a sibling or friend and buy as a joint venture. This way you could both contribute to the deposit.

4. Use a guarantor

It is possible to refinance a loan using a guarantor, meaning you won’t have to pay LMI. The guarantor acts in place of LMI, utilising the equity in their property as the 20% deposit needed. If the mortgage holder defaults on the home loan, the guarantor may become responsible for the repayments.

You might also like: Should I be guarantor for my child?

The risks of having a guarantor

Using a guarantor isn’t a risk-free solution to refinancing without having to pay LMI twice, as it comes with its own set of potential issues. Unfortunately, most of the risks lie with the guarantor, so they must understand the terms and conditions before signing on the dotted line.

If the guarantor ends up responsible for servicing the loan, and can’t make the repayments themselves, it potentially puts their property at risk as the bank can take possession. This situation can be avoided by using the equity in an investment property, instead of in a primary residence. In fact, some banks only allow guarantors to use their investment properties.

Acting as a guarantor can potentially limit or inhibit someone from borrowing money. A guarantor arrangement needs to be disclosed to the bank when borrowing money, which may limit your chances of approval, even if everyone involved is making their regular repayments.

Other risks included:

  • Both the guarantor and the mortgage holder might have their credit rating affected if the mortgage holder defaults on the loan.
  • The personal relationship could be affected if the financial relationship goes south
  • Choosing a guarantor in place of using savings or equity could potentially result in the loan costing more in the long run.

You might also like: What are the costs of refinancing a home loan?

Am I eligible for an LMI refund?

If you’re looking to refinance, you could make further savings with a partial LMI refund. You can determine if you are eligible by merely asking your home loan lender; however, they are only approved under specific circumstances, which vary from lender to lender.
Depending on your lender, mortgage holders are only potentially eligible for partial LMI repayments if:

  • The loan has never been in default, arrears or had late repayments.
  • The loan was repaid in full within 1- 2 years from the settlement date.
    • within 12 months of the settlement date, you could be eligible for a refund of 40% of the premium.
    • from 12 months to less than or equal to 24 months, you could be eligible for a refund of 20% of the premium.
  • The calculated refund amount is greater than the minimum threshold (any stamp duty is not refundable).

If you are eligible for a refund, you may potentially receive up to 40% back. If you are in the second year of your mortgage, you could be eligible to receive a refund of 20-30%.

Each lender has it’s own terms and conditions for refunding an LMI fee – speak to the lender directly to find out more.

You might also like: 10 New Year Resolutions for Your Home Loan

Words by Nell Matzen

Sources:

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