Depending on how much you borrow, you may come up against something called Lenders Mortgage Insurance. While this can seem like a significant and unwanted expense, sometimes there’s more to it.

So what is Lenders Mortgage Insurance?

Lenders Mortgage Insurance is often referred to as LMI. It is insurance that a lender takes out to insure itself against the risk of not recovering the full loan balance if the borrower (you) were unable to meet loan repayments.

LMI is usually a one-off fee charged by the Lender to you when you need to borrow more than 80% of the value of the property, although there are now some options out there to pay it off monthly.

Benefits of LMI

The benefit of LMI is it allows customers who do not have a substantial deposit, but would otherwise meet the lenders credit requirements, to borrow from a lender.

LMI covers the outstanding balance of the loan owing to the lender if the sale of the property does not cover the total loan amount.

What is the cost of LMI?

The LMI premium payable can either be included into the loan amount (called capitalisation of LMI) or paid upfront on settlement. The lender will be able to provide you the applicable costs of LMI.

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.

The cost of LMI will vary and it will depend on the lender, how much is borrowed and the size of the deposit.

Is LMI refundable?

LMI may be partially refundable if the loan is terminated early, usually within the first two years.

Each lender will have their own refund arrangements, so it’s important to understand what is on offer in the market as getting it wrong could be costly.

What happens if a borrower defaults and the property is sold?

If you (the borrower) are unable to meet your 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 you to repay this sum directly to them.

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.

It is important in these circumstances to do your research, as this 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 avoid paying LMI again.

Case Study

Case study Bob and Jill 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 Bob and Jill 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 Bob and Jill by way of a fee called a “premium”. The Lenders Mortgage Insurance protects the lender if Bob and Jill default on their loan repayments – it does not protect Bob and Jill.

So, as you can see there is a quite a bit to think about with lenders mortgage insurance. It’s not necessarily a good or bad thing, depending on your circumstances. If you’d like to chat through your options, reach out to us at any time.