The quick guide to lenders mortgage insurance
Lenders Mortgage Insurance – often referred to as LMI for short – is an insurance that lenders take out to protect themselves. Against what? Against the risk of not being able to recover the full loan balance if the borrower is unable to meet loan repayments.
Typically, lenders require you to pay LMI if you need to borrow more than 80% of the value of the property. This is because you represent a higher risk to them as a lender because you have contributed less equity. Let’s look at how it works in a little more detail.
The benefits of LMI
Let’s begin with the benefits. In a nutshell, it allows you to get a loan when you don’t have a substantial deposit (provided you meet the lender’s other criteria of course).
What is the cost of LMI?
LMI is a one-off fee. How much you pay depends on the size of the loan, the size of your deposit and the lender’s policy. You can pay for the LMI upfront out of your cash at the time of settlement or you can add it to the cost of your loan – called capitalisation. It is important to note that if you choose to capitalise the LMI, your loan repayments are based on the higher loan amount which includes the LMI premium.
What happens if a borrower defaults and the property is sold?
If a borrower is unable to meet their loan repayments and there is no other resolution, the property may need to be sold to cover any outstanding loan amount. The LMI insurer will pay the lender in accordance with their LMI policy and could then ask the borrower to repay this sum directly to them.
Remember, LMI does not protect you or cover your loan repayments in the event you are unable to make the repayments on your mortgage. You should discuss personal insurance options such as Mortgage Protection Insurance with your broker to cover any unforeseen circumstances.
What happens when the loan is refinanced?
LMI is lender specific, which means if you refinance your home loan to a different lender and you borrow more than 80% of the value of the property, you will have to pay LMI again. If you find yourself in this position, it pays to do your research as the extra LMI cost may outweigh the benefits of refinancing to a lower interest rate.
If the equity in your home has increased or you have paid down the principal on your loan, you may not need to borrow more than 80% with the new lender and therefore can avoid paying LMI again.
Is LMI refundable?
If you terminate your loan early, usually within the first two years, LMI may be partially refundable. Each lender will have their own refund arrangements that’s you’ll need to investigate.
Kristy and Matt have found a home they want to buy for $500,000. Typically, they would need a 20% deposit ($100,000) to secure a loan from their lender. By taking out Lenders Mortgage Insurance, their lender is prepared to provide a loan up to 95% of the value of the home.
This means that Kristy and Matt can secure a home loan sooner with a 5% deposit ($25,000) and stop paying rent. Their lender passes on the Lenders Mortgage Insurance premium cost to Kristy and Matt by way of a fee called a “premium”.
The Lenders Mortgage Insurance protects the lender if Kristy and Matt default on their loan repayments
– it does not protect Kristy and Matt.
Disclaimer: The information provided on this page is not legal, taxation or financial planning advice. It has been prepared without considering your specific needs, objectives and personal financial situation. Before acting on this information, we recommend that you consider carefully if it is appropriate for your needs, objectives and personal financial situation. All loan products are subject to lender criteria and approval. Fees, terms and conditions apply.