Lenders Mortgage Insurance and Refinancing: What You Should Know
For homeowners who are thinking of refinancing, knowing a bit about Lenders Mortgage Insurance (LMI) can be helpful. This is because LMI can play a huge factor in your refinance. And these days, homeowners are refinancing in record numbers as interest rates continue to climb.
In Queensland, the number of refinanced loans recently jumped to 85,713, a year-on-year increase of 17.4%! The high demand for refinanced loans has sparked renewed competition among lenders. This means lenders are now offering more competitive loan products, with improved features and even cashback deals. But before you decide to refinance, it’s important to consider Lenders Mortgage Insurance.
What is Lenders Mortgage Insurance?
What is Lenders Mortgage Insurance? It’s an insurance policy designed to protect lenders on higher-risk loans. Lenders use a Loan-to-Value Ratio (LVR) to decide whether or not to charge LMI. LVR describes what percentage of the total property value you need to borrow. Ideally, you’ll have a 20% deposit, which means you’ll only need to borrow 80% of the total cost (meaning your LVR is 80%). But if your LVR exceeds 80%, you may be classified as high-risk and the lender could charge you LMI.
LMI is more often associated with first home buyers than refinancing. However, lenders still use the LVR calculation when evaluating a refinance application. That’s why it’s important to understand “What is Lenders Mortgage Insurance?” before you decide to refinance.
How Much is Lenders Mortgage Insurance?
How much is Lenders Mortgage Insurance? People are often surprised by how expensive it can be. An LMI policy can cost between a few thousand and tens of thousands of dollars. The final cost will be influenced by:
- Whether you’re a first home buyer/investor
- The size of the loan/deposit
- Your state
- What industry you work in (LMI waivers apply for certain industries)
For a more personalised assessment, ask an experienced broker, “How much is LMI?”
LMI and Refinancing
Refinancing is when you replace your existing home loan with a new one, generally to secure lower interest rates or better loan features. Refinancing is also an excellent way to utilise the equity in your property. A refinancing homeowner may use equity to consolidate debts, fund a renovation or as a deposit on an investment property.
When could you be charged LMI? Consider the following examples:
- Jim bought his first property in 2020. Since he met the criteria for the First Home Loan Deposit Scheme, Jim secured a loan with a 5% deposit, without having to pay LMI. In 2023, Jim decides to refinance. While property prices in his area have increased, his available equity only accounts for 16% of the total value of the loan. This gives him an LVR of 84%, meaning he would be charged LMI when refinancing.
- Rachel wants to use the equity in her home to buy an investment property. Although her initial home loan had no LMI, this investment loan exceeds an 80% LVR. As a result, the lender requires LMI due to the perceived risk.
Lenders Mortgage Insurance Refund Possibilities
If you’re familiar with LMI, you may have heard of a Lenders Mortgage Insurance refund. This refund will only be possible in very limited circumstances. While specific criteria vary amongst providers, an LMI refund may apply if:
- You have never defaulted or made a late payment.
- You’ve repaid the loan in full within 2 years.
- The refund is more than $500.
Lenders Mortgage Insurance Calculator
Some online calculators will provide an estimate of how much is LMI. A Lenders Mortgage Insurance calculator can be a useful first step in assessing how much it might cost. However, such a calculator can only provide generic information. If you’re serious about refinancing, the best thing to do is speak with a mortgage broker.
Talk to a Mortgage Broker About Lenders Mortgage Insurance
Are you thinking about refinancing? At North Brisbane Home Loans, we’re committed to helping customers achieve the best possible results. This means we’ll examine all the options, do a cost/benefit analysis (that takes into consideration LMI), and provide a recommendation on what’s best for you. To get started on your refinance journey, book an appointment today.