Lenders Mortgage Insurance is often referred to as LMI. It is insurance that protects your lender in the unfortunate event of you defaulting on your home loan. When lenders agree to lend a customer money, there is a risk that they won’t get the full loan balance back if the customer is not able to meet the repayments. Although they have the property as security, if property values decline that security may not be enough to cover the outstanding loan.
A strategy that helps you purchase a home with less deposit.
As a general rule, Lenders Mortgage Insurance is payable when the loan is in excess of 80% of the security property’s value, as determined by the lenders independent valuation.
- The lenders’ mortgage insurance provider’s policy is with the lender. The premium is usually passed on to the borrower as a cost of providing the loan.
Unlike traditional insurance premiums, LMI is usually a once off premium payable at loan settlement that provides cover for the full term of the loan. The cost will vary depending on how much money you borrow and the size of your deposit. Most lenders allow the premium to be capitalised into your loan subject to certain limitations. It is important to note, if you choose to capitalise the LMI, your loan repayments are based on the higher loan amount which includes the LMI premium.
LMI is lender specific, which means if you refinance your home loan to a different lender and your loan is still more than 80% of the value of the property, you will have to pay LMI again. Do your research, as this may outweigh the benefits of refinancing to a lower interest rate. If the equity in your home has increased and/or you have paid down the principal on your loan, you may be under that 80% threshold with the new lender and therefore avoid paying LMI again.
If the 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.
LMI does not protect you or cover your loan repayments in the event you are unable to make the repayments on your mortgage.
Before lenders’ mortgage insurance was available, lenders usually required a deposit of around 20% to protect themselves in the event of a client defaulting. This was to guard against the risk of the property being sold at a price less than the outstanding amount of the loan. With the ability to share this risk with an insurance company through lenders’ mortgage insurance, lenders have been able to accept a lower deposit from clients, which is especially good for first home buyers.
The end result is that more home loans are available to more people. By reducing the deposit required and helping to minimise lending interest rates, many borrowers are able to purchase a home much earlier, or buy a better property, than they would otherwise have been able to afford before Lenders’ Mortgage Insurance.
For property investors, Lenders’ Mortgage Insurance allows borrowers to leverage into more investment assets and access current negative gearing benefit.
Whilst Lenders Mortgage Insurance might represent a significant additional cost to your property aspirations, we believe it is nothing to fear as it might get you into that dream property earlier than you thought.