Is LMI refundable? What first home buyers should know

Short answer: in some cases, yes. Whether LMI is refundable depends on your lender, your insurer and what happens to your loan. The clearest example sits in the rules around switching loans. According to ASIC’s MoneySmart, if you decide to switch home loans you can ask for a refund of some of the LMI from your current loan. So the question “is LMI refundable” is not a simple yes or no. It comes down to your circumstances and lender criteria, and this guide walks you through how it actually works.

First, the plain-English version. LMI stands for Lenders Mortgage Insurance. MoneySmart describes it as cover that protects a credit provider if borrowers are unable to repay their loan. It does not benefit you, it only protects the lender. You pay the premium, but the cover sits with the bank.

When LMI applies in the first place

LMI is usually a one-off cost, payable when the amount you borrow is more than 80 per cent of the value of the property. Put another way, it tends to apply when your deposit is below 20 per cent. The size of your loan compared with the value of the property is called your loan-to-value ratio, or LVR. The higher your LVR, the more likely LMI is in play.

Because LMI is charged once when the loan is set up, rather than as a monthly fee, the refund question only really comes up when something changes early in the life of the loan. That is the heart of the “lmi refund” question that so many first home buyers ask.

Is LMI refundable? The honest answer

Here is where the detail matters.

LMI is generally treated as a one-off premium that covers the lender for the term of the loan. It is not a deposit you get back, and it is not designed to be returned simply because you have made your repayments on time. So for most borrowers who keep their loan running normally, there is nothing to refund.

The situation can be different when you repay or refinance the loan very early. When you switch home loans, MoneySmart notes you can ask for a refund of some of the LMI from your current loan. The reasoning is that the premium was priced for a longer relationship between you, the lender and the insurer, and ending it early may mean part of that premium was not used. This is where “can you get lmi back” stops being a hypothetical and becomes a real question to put to your lender.

A few things shape whether any refund is available, and how much:

• How soon you repay or refinance after the loan started. Refunds, where they exist, are usually only considered in the early period of the loan.
• The specific policy of your lender and its mortgage insurer. Refund rules are set by individual insurers and lenders, not by a single national standard, so two borrowers in similar positions can get different answers.
• Whether you ask. A partial LMI refund is not always applied automatically. As MoneySmart puts it, if you decide to switch, ask for a refund of some of the LMI from your current loan.

We will not quote a fixed refund percentage or a guaranteed timeframe here, because those figures are set by each insurer and lender and are not published as a single national rule. The right move is to ask your lender directly, or have a broker do it for you, so you get an answer that fits your actual loan.

You can also explore how the premium itself is worked out on our guide to how LMI is calculated, which helps you understand what any refund would be a portion of.

LMI and switching loans: where refunds usually come up

Refinancing is the most common moment the LMI refund question surfaces. If you took out your loan with a small deposit, paid LMI, and now want to switch to a lower rate, two things can happen at once.

That is the trap to watch. A small partial refund on the old loan does not always cancel out a fresh LMI premium on the new one. It depends on how much equity you have built and what the new lender requires.

It also helps to remember that LMI is one of several switching costs. MoneySmart lists costs to weigh up when switching, which can include a break fee on fixed rate loans, a discharge or termination fee, an application fee, a switching fee and stamp duty. LMI sits alongside these, not on its own.

If you are weighing up a switch, the switching home loans calculator can help you see whether the move stacks up once these costs are included.

How LMI refunds usually work, step by step

The process is fairly consistent, even though the figures vary.

A broker can run these steps for you and put the same question to multiple lenders, which is useful because each lender and insurer applies its own refund policy.

LMI is not the same as mortgage protection insurance

One common mix-up is worth clearing up, because it changes what you can expect back. LMI protects the lender if you default. It is not a policy that pays out to you, your family or your estate. Mortgage protection insurance is a separate product that may cover your repayments if something happens to you. They are different things, with different purposes, and LMI refund questions only apply to LMI itself.

Who may pay no LMI at all, and so have nothing to refund

If you are still planning your purchase, the simplest way to avoid the refund question entirely is to avoid LMI in the first place. There are a few recognised paths.

• A 20 per cent deposit. Reach 20 per cent and LMI generally does not apply, so there is no premium to pay or refund later.
• A government low-deposit scheme. Some eligible buyers can purchase with a smaller deposit and still avoid LMI through a government guarantee. Eligibility depends on the scheme rules and lender criteria.
• A family guarantor. Some buyers use a guarantor to lift their effective deposit and avoid LMI. Whether this is available, and whether it suits your family, depends on your circumstances and lender criteria.

If a smaller deposit is your reality, it can help to read how a low deposit affects your position on our guides to what LVR means for first home buyers and buying with a 5 per cent deposit.

If your lender refuses a refund you think is fair

If you believe a partial LMI refund should apply and your lender disagrees, you can raise it through the lender’s internal complaints process first, and then, if it is not resolved, escalate to the Australian Financial Complaints Authority (AFCA). AFCA handles disputes between consumers and financial firms. This is general information, not a prediction of any outcome, and what happens depends on the facts of your case.

Talk it through

LMI refunds are one of those details that sound simple but turn on the fine print of your lender and insurer. If you want a clear read on whether you may be able to get some LMI back, or whether a refinance is worth it once LMI and other costs are counted, the team at Finance Lab can walk you through it.

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