Understanding Lenders Mortgage Insurance

Ever wondered what Lenders Mortgage Insurance (LMI) is all about? Dive in below to understand how LMI works, why you might need it, and how it impacts your home loan.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance is an insurance policy that protects the lender from financial loss if the borrower fails to repay the loan. It’s important to note that unlike other types of insurance which protect the policyholder, LMI safeguards the lender — not you as the borrower.

How Does LMI Work?

LMI is typically required by lenders when a borrower has less than a 20% deposit for their property purchase. This situation is classified as a high Loan-to-Value Ratio (LVR) mortgage. The higher the LVR, the greater the risk the lender assumes in providing the loan, hence the need for insurance. The cost of LMI varies depending on the size of the loan, the amount of the deposit, the type of property, and the insurer’s policies. These premiums can be quite substantial and are often added to the loan amount, meaning you could be paying it off over the life of your loan with interest.

Benefits of Lenders Mortgage Insurance

1. Enables Homeownership Sooner: With LMI, borrowers who cannot afford a 20% deposit are still able to enter the property market sooner rather than later.
2. Increases Borrowing Power: Borrowers might be able to take out a larger loan than otherwise possible, affording them a better property.
3. Flexibility: Offers more flexibility in the percentage of the purchase price a buyer can borrow, sometimes up to 95%.

Drawbacks of Lenders Mortgage Insurance

1. Additional Cost: LMI adds an extra cost to your home purchase, which can significantly affect the total amount paid over the life of the loan.
2. Not Transferable: If you refinance or move homes, your LMI does not carry over. You may have to pay a new LMI premium with the next loan if your equity is still under 20%.
3. Protection for the Lender Only: Remember that this insurance does not cover you as the borrower in any way. If you default on your loan, the insurance will only cover the lender’s losses.