Lenders mortgage insurance, often referred to as LMI, is insurance that protects the lender from losses that may arise in the event of a default—if the borrower fails to make their mortgage payments. This insurance covers the lender, but the premium is paid by the borrower via a lump sum added on top of the total loan amount to become a part of the mortgage.
As a borrower, you will be liable to pay LMI if your deposit is less than 20% of the overall property purchase price, since a smaller deposit means the bank takes on a greater risk in financing the property. The smaller the deposit the higher the risk, hence a 5% deposit attracts a higher LMI cost than a 10% deposit.
The percentage of the property value the bank needs to finance is referred to as the loan to value ratio or LVR. A 5% deposit means the bank finances 95% of the property value (95% LVR), whereas a 20% deposit equates to an 80% LVR. A lower LVR means a lower risk to the bank.
If you have a 20% deposit you will generally not have to pay LMI, which can be a big cost saving. However, a smaller deposit may get you into your new property a lot sooner, so the question of how much you should save for your deposit, and whether LMI needs to be paid, really depends on your personal priorities and financial resources.
As a Melbourne mortgage broker we understand the unique challenges of our local market and can work with you to create a plan and a savings strategy for your deposit, if you are in the early stages of planning your property purchase.