What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance, or LMI, is an insurance policy that protects the lender in the event that the borrower defaults on their home loan. It is paid as a once off premium when the loan is taken and does not influence the interest rate.
When do you need LMI?
Whilst some differences can apply in specific circumstances with some lenders, the general rule is that LMI will apply if the borrower is seeking finance for over 80% of the value of the property.
Why do banks need LMI?
Until the 1960s lenders would only provide loans to buyers for up to 80% of the value of the property. Banks saw it as too great of a risk to lend above this amount in case the borrower was unable to make the repayments. This made it incredibly difficult for those looking to purchase their first home to enter the market.
The introduction of LMI enabled them to lend more as the bank transfer some of the risk to the insurer – in the same way people shift the cost of replacing a stolen television with home contents insurance.
Who and what is protected by LMI?
The greatest confusion we see around LMI regards who and what the insurance covers. Lenders mortgage insurance only protects the lender in the case that the borrower is no longer able to make their repayments. If the lender cannot recover all of their money they can make a claim.
LMI should not be confused with insurance protects that a borrower can take – such as loan protection insurance or mortgage protection insurance. It is also important to investigate various life, disability and income protein insurances when purchasing a property and taking out a mortgage. For most people their home is their largest asset and it is important to secure it and your financial health.
LMI in the real world
Although there are only two major LMI insurers in Australia the cost of the LMI premium can vary between lenders – each will have their own commercial agreements and policies. Whilst it is not possible to choose which mortgage insurer your lender uses, Union Shopper Mortgage Planners will be able to provide costs to you so that you can make an informed decision on which lender to proceed with. The two main factors that influence the cost of LMI are the loan amount and what percentage of the value of the property is being borrowed.
Because LMI can range widely in cost – from a few thousand dollars to over twenty thousand in some cases – most lenders will allow you to add some (or all) of it to the loan amount.
If you have any questions about Lenders Mortgage Insurance don’t hesitate to contact us on 1300 760 688.