Lenders Mortgage Insurance (LMI) is protection for the banks in case your fault on your loan. What does that mean? The insurer will pay the bank for any losses resulting in the sale of a property due to the default by the borrower.

When is LMI applicable? Any borrowings over 80% will need to pay LMI. The LMI premium is tiered and increases with the value of the loan ratio (80 – 95%). The higher your loan amount the premiums can get quite expensive. With most lenders you can either pay the premium upfront or you can add it onto the total loan amount. Loans at 95% you will most likely need to be for part of the premium upfront.

Is this cost worth bearing? Should you try to avoid LMI? Like all things it depends your particular situation and what you are trying to achieve. If you can avoid LMI then this is obviously idea.

However if avoiding LMI is going to impact your investment strategy then you might want to re-think your strategy.

My example is the following:

Two Investors both have access to $140,000 to contribute towards a new purchases. Both investors are looking at a $450,000 property in the city. The extra costs (conveyancing, stamp duty etc) to purchase the property are $20,000.

Investor 1: does not want to pay LMI

• Uses a 20% deposit to secure the loan = $90,000
• Has to pay the costs of = $20,000
• Does not incur any extra fees
• Loan amount = $360,000
• Loan repayments I/O @ 5% = $1500
• Total funds used = $110,000
• Has an additional $30,000 (not enough for another deposit)

Investor 2: Loan at 90% plus LMI

• Buys the one unit for $450,000
• Uses a 10% deposit to secure the loan = $45,000
• Has to pay the costs of = $20,000
• Adds the mortgage insurance premium of $7500 onto the loan
• Loan amount = $412,500
• Loan repayments I/O @ 5% = $1719
• Total funds used = $65,000
• Has an additional $75,000
• Smart investors buys another $450K property and keeps $10,000 as a buffer for the loans

What does all of this mean?

• Smart investor has purchased 2 properties worth $450,000 and has a $10,000 cash buffer
• Smart investor now has $900,000 worth of real-estate growing for them
• Smart investor paid an extra $15,000 in mortgage insurance (1.6%)
• Smart investor pays an extra $219 per month for the extra borrowings for the one loan
• Conservative investor has purchased one property worth $450,000 and left the $30,000 in cash to put into another investment
• Conservative investor has $450,000 worth of real-estate growing for them

Related Tag: Investment Property Loan Australia