What is Lenders Mortgage Insurance (LMI) and a Lender Protection Fee (LPF)?

What is Lenders Mortgage Insurance or a Lender Protection Fee (LPF)?

Looking to get a foot in the door of the property market sooner? A mortgage with a smaller deposit could be an option for you. Here we ask: what is LMI and LPF, how do they work, and how are they calculated?

LMI and LPF explained

Lenders Mortgage Insurance (LMI) is an insurance policy that protects the lender in case the borrower cannot pay the mortgage repayments, and the property sells for less than the outstanding loan amount. 

An LPF serves a similar purpose to LMI - it helps protect the lender from financial loss if the borrower can’t afford to meet their repayments and default on the loan. It is charged by some lenders instead of LMI. A borrower would pay one or other, not both. 

Typically, the lender will require LMI or an LPF if you do not have a sufficient home loan deposit (usually 20% of the property's value). The cost is usually passed to the borrower as a one-off fee. 

Put simply, LMI and LPF are a safety net for the lender if it is unable to recover the home loan amount.

LMI and LPF facts to remember

• LMI or an LPF can be required when you don’t have a 20% deposit, i.e.when your Loan-to-Value ratio (LVR) is higher than 80%.

• Only one of the charges will apply - the lender will either take out an LMI premium or charge an LPF, not both.

• The lender will usually pass on the cost to you.

• LMI or LPFs protect the lender, not the borrower (or any guarantors).

• LMI and an LPF are one-time, non-refundable fees paid at loan settlement.

• Most lenders will include the LMI fee or LPF in the loan amount (some will add it to the loan amount).

Example

• Imagine you want to buy a house worth $200,000, and you need a deposit of $40,000 (20% of the property's value). 

• If you’ve only saved $20,000 for a deposit but can afford the loan, you might be eligible for LMI or an LPF, because your LVR would be 90%.

• If the lender approves, they will take out LMI (or charge an LPF) and lend you $180,000 to buy your property. 

NOTE: The Lenders Mortgage Insurance fee, or Lender Protection Fee may be included in the loan amount or added to the loan, depending on varying factors.

How does the borrower benefit from LMI or an LPF?

These one-off fees can enable borrowers to access home loans and the property market sooner. 

A required deposit is typically 20% of a property's purchase price. Saving this large lump sum can be extremely challenging, especially during tough economic conditions. LMI and LPF can give you an opportunity to purchase a home when you don't have a full 20% deposit amount. 

LMI / LPF gives the lender confidence to offer you a home loan without reaching that 20% deposit. Some lenders will even take a 5% deposit in some cases.

Keep in mind, a loan that requires LMI or an LPF (with a higher Loan to Value Ratio) may also have a higher interest rate compared to a loan without these fees. This is due to some lenders offering a lower interest rate for lower Loan to Value Ratio (LVR) applications.

How much is LMI or an LPF?

An accurate LMI / LPF figure can only be given once you select a property and lender. The cost of LMI / LPF can vary greatly depending on the size of your deposit, the lender, the loan amount, and the property's worth. 

Usually, the smaller your deposit, the higher the LMI premium (or LPF) will be. 

As mentioned above, most lenders will include the LMI or LPF fee in the loan amount. However, remember that if the LMI or LPF fee is included in the home loan amount, the borrower will pay interest on the total loan, which will increase the minimum monthly loan repayments.

How is LMI and an LPFcalculated? 

LMI / LPF is calculated as a percentage of your home loan amount. It will vary depending on your lender, Loan-to-Value Ratio (LVR), and the amount you wish to borrow. The percentage will increase as the LVR and loan amount increase and will usually go up in stages.

Remember: LVR is the amount you're borrowing as a percentage of the value of the property you're buying. This means the bigger the deposit, the lower the LVR will be.

How to avoid LMI or an LPF? 

The most effective way to avoid LMI, or an LPF, is by saving the minimum deposit for the property purchase. Aiming for a 20% deposit or more can minimise your LVR and eliminate the need for LMI / LPF.

Some lenders may allow borrowers to avoid LMI or LPF if a deposit is less than 20% through an eligible guarantor arrangement. A guarantor is usually someone close to you who uses the equity in their home to secure your loan. This equity must be enough to cover a 20% deposit to avoid paying LMI / LPF.

Another option is to consider a property with a lower purchase price. Opting for a more affordable home can help you save up the 20% deposit faster.

When is LMI or an LPF paid?

LMI and an LPF is typically a one-time fee that the borrower pays when the loan is settled. Lenders often add the cost to the total loan amount and roll it into your mortgage repayments. This spreads the cost over the life of the loan, but will add to the loan total and interest paid.

You have to be a Qantas Frequent Flyer member to apply for a Qantas Money Home Loan. This website contains general advice only. This information has been prepared without considering your objectives, financial situation or needs. You should consider your circumstances before acting on this information.

^Qantas Frequent Flyer members will earn 100,000 Qantas Points upon settlement of their Qantas Money Home Loan. Members will earn the annual bonus of 100,000 Qantas Points three months after the settlement anniversary of their Qantas Money Home Loan for up to 30 years. Both upfront and ongoing points will be credited to the member’s Qantas Frequent Flyer account within 8 weeks of the Qantas Points being earned, provided the loan is in compliance with the Qantas Money Home Loans Points Eligibility Policy, not in arrears or default and the loan is not the subject of hardship relief or assistance. In the instance of joint applicants, the Qantas Points by default will be awarded to the primary applicant annually unless you opt to either split the points between the secondary and primary applicant or award the points in full to the secondary applicant.