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Lenders Mortgage Insurance (LMI) Guide for Islamic Loans in Australia
Lenders Mortgage Insurance (LMI) is a one-time premium that protects the lender, not the borrower, if you default on your Islamic loan. It typically applies when borrowing more than 80% of a property’s value and is common in both conventional and Islamic loans in Australia.
When Is Lenders Mortgage Insurance (LMI) Required and How Is It Applied?
LMI is required when borrowing over 80% of the property's value.
If you’re applying for an Islamic loan and your deposit is less than 20%, lenders will usually require LMI. For self-employed borrowers on low-documentation (low-doc) loans, LMI kicks in at a lower threshold, typically at a 60% Loan to Value Ratio (LVR). The insurer is selected by the lender, and the premium is deducted from your loan amount or capitalised into the Sharia mortgage. You don’t need to organise this yourself—it’s handled during the loan approval process.
Can Lenders Mortgage Insurance (LMI) Help Borrowers with Smaller Deposits?
Yes, LMI allows you to purchase a home sooner with deposits as low as 5%.
LMI specifically enables borrowers to purchase a home with a smaller deposit, thereby reducing the upfront cost associated with property acquisition. This insurance allows quicker access to property ownership, which is particularly beneficial for first home buyers and those with less in savings. However, it is crucial to understand the overall cost implications and to explore whether there are effective strategies you can employ to avoid this expense entirely.
How Much Does Lenders Mortgage Insurance (LMI) Cost for Islamic Loans in Australia?
The cost of LMI varies significantly based on your islamic loan amount, LVR and finance type.
The cost of Lenders Mortgage Insurance can vary widely based on your Islamic loan amount, the Loan to Value Ratio (LVR) and finance type. It is crucial to incorporate this cost into your overall budget when planning to purchase a home. This expense can substantially affect your financial planning.
Here is an indicative range for LMI costs across different islamic loan amounts and LVRs:
Loan Amount |
85% LVR |
90% LVR |
95% LVR |
|---|---|---|---|
|
$600,000 |
$9,000 - $10,500 |
$13,500 - $18,000 |
$27,000 - $33,000 |
|
$800,000 |
$12,000 - $14,000 |
$18,000 - $24,000 |
$36,000 - $44,000 |
|
$1,000,000 |
$15,000 - $17,500 |
$22,500 - $30,000 |
$45,000 - $55,000 |
|
$1,500,000 |
$22,500 - $26,500 |
$33,750 - $45,000 |
$67,500 - $82,500 |
|
$1,750,000 |
$26,250 - $30,625 |
$39,375 - $52,500 |
$78,750 - $96,250 |
|
$2,000,000 |
$30,000 - $35,000 |
$45,000 - $60,000 |
Not Available |
|
$2,500,000 |
$37,500 - $43,750 |
Not Available |
Not Available |
What If I Cannot Afford to Pay LMI Upfront?
LMI can be added to your loan amount, otherwise know as capitalised.
Instead of paying LMI at settlement, you may choose to add it to their Sharia mortgage amount. This is known as capitalise. You can only capitalise your LIM premium up to a maximum LVR of 95%.
For example, if your are purchasing a property for $650,000 and required an Islamic loan for $595,000 and the LMI premium is $20,000, your final loan would be $615,000 and your final LVR would be 94.6%.
While this option improves cash flow upfront, it increases the total loan amount increasing your monthly payments.
Can I Avoid Paying LMI Altogether?
Yes, several effective strategies exist to avoid paying Lenders Mortgage Insurance.
- Save A Larger Deposit: Saving at least 20% of the property’s purchase price for your deposit can help you avoid the need for LMI. This not only reduces your loan amount but also demonstrates to lenders that you are a low risk borrower.
- Use Government Grants And Schemes: Some government grants and schemes are designed to help first-time homebuyers or those in specific circumstances boost their deposit. The following available schemes currently exist:
- Have A Guarantor: A guarantor, often a close family member, can use their property as additional security for your Islamic loan. This reduces the lender’s risk, allowing you to bypass the LMI requirement even with a smaller deposit.
- Bank of Mum and Dad: A loan or gift from parents or family can go towards increasing your deposit for your home reducing the need for LMI.
- Professional LMI Waivers: Certain professions, such as doctors and accountants, may be eligible for LMI waivers with specific lenders. This is due to their perceived low risk. Speak to one of our experts to see if your profession qualifies for any LMI discounts or waivers.
Summary: Key Insights on Lenders Mortgage Insurance in Australia
- LMI protects lenders when you borrow more than 80% of the property value.
- The LMI premium is a one time cost, which you can pay upfront or capitalise into your Islamic loan.
- LMI helps borrowers, especially first-home buyers, enter property ownership with a smaller deposit.
- The cost of LMI varies based on your Islamic loan amount, LVR and finance type.
- Strategies to avoid LMI include:
- saving a larger deposit,
- utilising government schemes,
- having a guarantor,
- utilising the Bank of Mum & Dad or
- qualifying for LMI waivers based on your profession.
Ready to Buy a Property With a Small Deposit?
At Crestmount Money, we help clients explore all options to buying a home sooner with Islamic loans in Australia. Whether you’re a first home buyer or looking to upgrade your home for your growing family, our expert mortgage consultants can guide you to the right halal finance solution.
Get started, speak to one of our expert today! Take the next step toward owning your home the halal way.