Capitalising LMI: how does it work?

How does capitalising lenders mortgage insurance work with LVRs?

When doing this is the lump sum payable to the insurer borrowed? or is the premium just divided into instalments?

I always assumed that if there was a premium payable that capitalising this amount would mean that you are borrowing more money. So, if that were the case wouldn't this impact your LVR and cause you to have to pay more LMI?

For example, if I borrowed 90% of a property worth $1million the LVR would be 90%. If I capitalised say $10k of LMI wouldn't my LVR then go to 91%? And wouldn't I then have to pay say another $1k in LMI?

I'm confused as to how it works?

Cheers
Beelzebub

 

It is confusing, but lenders generally just cap the ‘base’ lvr. The end lvr, is higher because it includes the lmi, but lmi isn’t calculated again on this.

 

They calculate LMI of your base LVR.

You can then capitalise it or pay it.

E.g. $500k security, $440k loan

Base LVR is say 88%.

They calculate LMI of this and then give you the option to capitalise it or pay it upfront.

 

Hi Beelzebub,

The LMI is calculated on the BASE LVR only.
So if you're borrowing 90% LVR then your LMI is caclucated on this amount and capitalised onto the loan. The total LVR would then be approx 92-93% LVR but the BASE LVR remains the same at 90%

 

Clears that one up. Thanks

 

Keep in mind most lenders have a max LVR inclusive of LMI. 90% max would mean about 87 or 88% plus LMI.