What Is Lenders Mortgage Insurance?
Lenders Mortgage Insurance, often called LMI, is insurance that protects the lender if a borrower cannot repay their home loan and the lender makes a loss after selling the property.
Although the borrower usually pays the cost, LMI does not protect the borrower. It protects the bank or lender.
When Is LMI Usually Required?
LMI is commonly required when a borrower has less than a 20% deposit.
For example, if you buy a property for $700,000 and borrow more than $560,000, your loan is above 80% of the property value. This is known as a higher loan-to-value ratio, or LVR.
The higher the loan compared with the property value, the more likely LMI may apply.
Why Do Borrowers Pay LMI?
LMI can help some buyers enter the property market sooner.
Instead of waiting until they have a full 20% deposit plus costs, a borrower may be able to buy with a smaller deposit, such as 5%, 10% or 15%, depending on lender policy and their financial position.
How Is LMI Paid?
LMI can often be paid upfront or added to the home loan. Adding it to the loan means the borrower does not need to pay the full cost immediately, but interest may be charged on that amount over time.
The cost of LMI depends on the loan size, deposit amount, property value, lender, borrower type and loan structure.
Can LMI Be Avoided?
Some borrowers may be able to avoid LMI by saving a larger deposit, using a guarantor, applying under an eligible government scheme, or qualifying for a professional LMI waiver.
Final Thought
LMI is not always bad. In some cases, it may help a borrower buy sooner. The key is understanding the cost, the risk and whether it suits your situation.
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Frequently Asked Questions
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance, or LMI, is insurance that protects the lender if a borrower cannot repay their home loan and the lender makes a loss after selling the property. Although the borrower usually pays for it, LMI protects the lender, not the borrower.
When do I usually need to pay LMI?
LMI is commonly required when you borrow more than 80% of the property value, meaning you have less than a 20% deposit. However, this can vary depending on the lender, borrower type, loan purpose, property type and overall application strength.
Can LMI be added to my home loan?
Yes, many lenders allow LMI to be added to the home loan, rather than paid upfront. This can reduce the amount of cash needed at settlement, but it also means interest may be charged on the LMI amount over the life of the loan.
