LVR and lenders mortgage insurance in Australia

Loan-to-value ratio is the quiet dictator of Australian home lending. It decides which rate tile you land on, whether a lender will look at the deal at all, and whether you will be asked to pay lenders mortgage insurance. LMI is widely misunderstood as a kind of life insurance for buyers. It is not. It is insurance for the bank, with your name on the invoice.

This piece explains how LVR is calculated, why valuation day is a risk event, what LMI costs in practice, and how government guarantees change the arithmetic without making a 5 per cent deposit 'safe' in the household sense.

How LVR is actually calculated

LVR = loan amount ÷ lender's valuation. If you contract to pay $780,000 and the valuer says $760,000, a planned 10 per cent deposit on the contract price is no longer 10 per cent of the security. You must cover the gap in cash or shrink the loan. This is why 'we've got 10 per cent' is not a complete sentence until the valuation is in.

Some lenders use the lower of purchase price and valuation. Some apply extra conservatism to studios, high-density towers, regional acreage or properties with defects. A brick house in a suburban street in Adelaide is not assessed like a 28-square-metre CBD studio.

The 80 per cent folklore

Australian conversation treats 20 per cent deposit (80 per cent LVR) as moral virtue. It is really a pricing and insurance threshold. Many lenders waive LMI at 80 per cent or offer their best rate bands there. Going to 85 or 90 per cent is common and legal; it is just more expensive. Going to 95 per cent is possible with the right product or a government guarantee.

Genuine savings rules still appear. Some lenders want the deposit to come from savings, not a last-minute personal loan. Borrowing the deposit with unsecured credit can both lift LVR and wreck borrowing power.

What LMI is, and is not

If you default and the property sells for less than the debt plus costs, LMI can pay the lender. The insurer may then pursue you. You have not bought yourself a reset button. You have bought the lender a safety net and you will likely capitalise the premium, which means the premium itself accrues interest.

Premiums vary with LVR, loan size, occupation type and the insurer's tables. A 90 per cent LVR loan can attract a premium of roughly 1 to 2 per cent of the loan — on $600,000 that is $6,000 to $12,000, sometimes more at 95 per cent. Capitalised, it is not a fee you feel on settlement day; it is a longer loan.

Some lenders offer LMI waivers for particular professions (doctors, some public servants) or for existing customers. Waivers are policies, not rights. Get them in the approval letter.

Capitalising versus paying the premium

Paying LMI in cash preserves LVR. Capitalising it increases the loan, which can nudge LVR up and, in awkward cases, change the premium again. Ask for both quotes. If you are close to a better LVR band — say 90.4 per cent after capitalisation — an extra few thousand of deposit can be the highest-return savings you ever make.

Guarantees are not deposits

The 5 per cent deposit scheme (Housing Australia's guarantee products, still widely called the First Home Guarantee) lets eligible buyers borrow up to 95 per cent without paying LMI, because the Commonwealth guarantees the lender for part of the risk. You still need a 5 per cent deposit, still need to pass serviceability, still need a participating lender, and still need to fit property price caps. The scheme does not make a thin deposit a thick one. It removes one bill.

Family guarantees — a parent offering security — can also reduce or avoid LMI. They put a parent's house in the blast radius. That belongs in a conversation with a solicitor, not in a group chat.

Rate loading at high LVR

Even without LMI, high-LVR loans are often priced higher. Compare the rate at 90 per cent plus LMI against waiting six months to reach 80 per cent. Sometimes waiting wins; sometimes rent and price growth eat the saving. Do the numbers with today's rent and a conservative price path, not a boom fantasy.

A worked sketch

Purchase $700,000. Deposit $70,000 (10 per cent). Loan $630,000, LVR 90 per cent if valued at $700,000. LMI say $9,000 capitalised → loan $639,000. At 6.2 per cent, the extra $9,000 costs roughly $560 a year in interest at the start, declining as you repay. Avoiding LMI by using an eligible guarantee, or by finding another $70,000, is a large lever — larger than haggling 0.05 per cent on the rate.

For deposit tactics see how much deposit you need. For the wider comparison method, return to comparing home loans. MoneySmart's pages on LMI are worth reading before you capitalise a premium you cannot see.

Inner-city units and the LVR haircut

A 90 per cent LVR on a house in a suburban street is not the same product as 90 per cent on a 32-level tower. Some lenders cap high-density units at 80 per cent, or they add a postcode overlay, or they refuse the building because the strata is a mess. LMI pricing also moves with dwelling type. If you are buying an apartment, ask the LVR question for apartments in this postcode, not for 'home loans' in general.

Foreign-income applicants and visa holders can meet further LVR caps. The brochure's 95 per cent is a citizen-and-PR story until proven otherwise.

Staged deposits and 'we've paid 10 per cent to the developer'

Off-the-plan deposits sitting with a developer are not always treated as equity the way a completed-home deposit is. Some lenders want to see the money as genuine savings as well as a contract deposit. If the developer is using your deposit as working capital, that is a different risk again. Construction and off-the-plan files need a lender who has done one last month, not in 2017.

A word on 'LMI refunds'

Some lenders refund unused LMI if you refinance or recast below a threshold within a period. It is a retention tool, not a right. If a broker mentions it, get the conditions in the letter. Do not buy a high-LVR loan because a refund might exist.