Lender's mortgage insurance

Are you trying to borrow money to purchase a property and your lender keeps saying "LMI"? That's Lender's Mortgage Insurance. With all the money you have to pay for it you'd like to think it would protect you, but it's actually for the benefit of your lender. That's why it's called Lender's Mortgage Insurance - it's insurance for your lender. It protects them if you can't pay back your loan for any reason. If you don't pay your loan, the insurer pays your lender, and then the insurer comes after you for payment. If you need to borrow more than 80% of the value of the property, your lender is going to want you to pay for LMI.

LMI is calculated based on a number of factors, including:

• investment property vs owner occupied

• first home owner or subsequent purchase

• loan value

• size of deposit

• type of loan

Like any insurance, it pays to shop around, because different lenders will offer you different premiums. Although the figure you're quoted can look scary on paper (anywhere from $2,000 right up to $30,000 or more), it is important to remember that it's a once off payment, and once it's paid it's paid for the life of the loan. Just don't go jumping between lenders while you still owe more than 80% of the property value or you might find yourself paying it a second time.

So, how do you get out of paying LMI? Well, some lenders will waive LMI for certain professions who are considered low risk borrowers, or for the purchase of some particular properties (e.g. a Defence Housing Australia property), but these are very much the exception to the rule.

The other way to avoid LMI (other than having a sufficient deposit) is to take out a guarantor loan. This could allow you to borrow more than the value of the property (sometimes as much as 110%), meaning it will cover all of your purchasing costs, such as stamp duty, legal fees, etc. Of course, this relies on you having a willing guarantor.

Depending on the type of the loan, you may be able to have a guarantor step in to guarantee only the deposit, meaning that if you default on the loan, the bank will only demand payment of the deposit from your guarantor, not the full loan amount. If you have family who would like to help you out but don't want to risk their own home, this might be an option to consider. If you're interested in taking this path, speak to some of the larger lenders like St George Bank or NAB. Alternatively, a broker should be able to point you in the right direction.

By far, the easiest and cheapest way to avoid LMI is to save at least a 20% deposit. While it might seem impossible in the current market, it could potentially save you money in the long run.

[Don't confuse LMI with mortgage protection insurance - that one's for you as the buyer, and protects you if you can't pay your loan. This is optional and is taken out by you, not your lender (although your lender might advertise this product or encourage you to take it out).]