What is LVR and LMI

What are LMI and LVR?

If you’re looking to buy your first home, you may have come across the acronyms LMI and LVR, especially if you’re working with a smaller deposit. So what exactly do they mean? And how will they affect you?

If you want to get onto the property ladder but that 20% deposit is still out of reach, there are two key terms you should get to know: LMI and LVR.

We explain what they mean and how they could help you own a property sooner than you thought.

Lenders Mortgage Insurance LMI

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) usually applies to borrowers who are taking out loans for more than 80% of the value of a property. As its name suggests, LMI covers the lender if you’re unable to pay back your home loan.

If you end up in this position, your property will be sold and any money from the sale will first go towards paying off your mortgage. If this still doesn’t cover the full amount you owe, LMI covers the lender for the difference between the sale price and the amount outstanding on your loan.

LMI doesn’t protect the borrower

Remember that having LMI in place doesn’t protect you from having to pay back the outstanding amount left on your home loan after your property is sold.

It’s simply extra protection for lenders, giving them more freedom to offer a higher loan amount in the first place. 

LMI and your Loan to Value Ratio (LVR)

This is where the link between LMI and LVR comes in…

Generally, you’ll need to take out LMI in a borrowing scenario where there’s a Loan to Value Ratio (LVR) of 80% or more. Lenders calculate your LVR by dividing the amount of your home loan by the value of your property. So if your property is valued at $600,000 and your home loan is $480,000, your LVR is 80%.

Loan to Value Ratio Explained

How high can my LVR be?

Different types of borrowers will be able to set up home loans with different Loan to Value Ratios. For example, as at September 2017, NAB currently offers loans to owner-occupiers with an LVR of up to 95%. Investors can have an LVR of up to 90%.

When do I pay for LMI?

You don’t have to pay for your LMI upfront when buying your property. Instead, the amount can be rolled into the total cost of your home loan. Your mortgage broker or home loan provider will talk to you about setting this up when you start discussing your loan.

How do I avoid paying for LMI?

One way to avoid paying for LMI is to save a larger deposit so your LVR falls below your lender’s threshold. An alternative method may be to set up a family guarantee.

A family guarantee lets a parent use their home to provide extra security for their child’s loan. If you’re considering this route, speak to your financial adviser.

Are there risks involved with family guarantees?

If you end up being unable to pay back your loan, the lender may ask your guarantor to cover the shortfall. In other words, they may be forced to sell their own home to cover it.

That means it’s important your guarantor seeks independent financial and legal advice and properly understands their obligations.

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