Lenders Mortgage Insurance (LMI) is insurance which protects the lender in an event you are unable to make repayments for your home loan. LMI is payable when borrowing more than 80% of the value of the property (i.e. when you have less than 20% deposit available). LMI can be capitalised (added) on the loan.
For first time home buyers or investors, first purchase is the hardest and it may take a lot more effort to save the 20% deposit required to save on the LMI. For home buyers, it may be worth considering getting into the market by paying LMI and hence not having to pay rent and hence the mortgage on someone else’s property. Additionally, for investors it may be worth exercising LMI to get into a market sooner where fundamentals may determine growth potential.
To put it into perspective, for instance Josh & Megan buys a 700k property. Josh & Megan only had 75k saved up and he can put 10% towards the $700k purchase. With the base Loan To Value Ratio (LVR) being 90% i.e. a Base Loan Amount being $630,000.
For one of the Big 4 banks, the LMI comes down to approximately $15,000. The end loan will be $645,000 ($630,000 + 15,000 LMI).
A 4% interest rate will mean $600 per annum interest repayment for the LMI portion of the loan. That is $1.65 extra repayment every day to own an asset sooner and paying down the principal on the overall loan balance. As opposed to taking another couple of years saving up further to avoid this small ‘cost of doing business’.
The interest chargeable on a loan of $645,000 with a 4% interest rate and a 30 year term, will be $2,150 per month.
The Principal & Interest Repayments on a $645,000 loan with a 30 year term and a 4% interest rate (as of today), mean a repayment of $3,080 per month. Such that Josh & Megan will be paying off their own asset by approximately $930 per month. Every monthly repayment means there is lesser balance on which Josh & Megan will need to pay interest on a lesser balance each month. Such that their home loan repayments are ‘reverse compounding’.
Other things to note…
If a market is rising then it is worth paying LMI when the property may grow 5%, 10% etc (depending on the fundamentals)
It’s worth paying LMI to purchase your own asset, saving on paying rent and paying off your own home / investment
Some lenders offer first home buyers discount on LMI so there is potential to save
LMI is best value at 88% LVR (i.e. 12% deposit), where when LMI capitalised the overall loan is 90% including LMI.
Home purchase can be up to 98% LVR including LMI i.e. 5% deposit (95% LVR + 3% LMI)
Investment purchases can be 90% LVR including LMI i.e. 12% deposit (88% LVR + 2% LMI) (with the bank lenders. Non-bank lenders may allow higher LVR than 90% for investments, however the LMI & interest will reflect in the pricing
LMI is tax deductible over 5 years for an investment property
Happy shopping 
Any questions or ready to make the move, happy to chat! Call Sana & Mona Ali on 1300 97 60 60 !
Note: Repayments were calculated on the CBA online repayments calculator
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