Lenders Mortgage Insurance (LMI) is taken out by the lender (the bank) and paid by you (the customer) to protect the bank in the event that you cannot meet your home loan repayments. Therefore, in the event when the lender sells the property, if there is a shortfall between the mortgage amount and the sale price, the lender is covered.
Loans more than 80% of the property price will generally need lenders mortgage insurance (LMI).
What is the benefit of LMI?
Lender’s Mortgage Insurance can help you enter the market sooner. It allows you to borrow more than 80% of the property purchase price. In other words, you can still be able to buy a property even if you have less than 20% of the property purchase price (including other fees and charges).
For first home buyers, particularly those struggling to save a deposit but more than comfortable to meet their mortgage repayments, it can be a key tool to break free of the rental trap.
What’s the catch?
If you default on your loan, Lender’s Mortgage Insurance only covers the lender/bank, not you!
Through financing a higher proportion of a property’s purchase price lenders take on a higher level of risk that you will fail to meet mortgage repayments, and the property needs to be repossessed and resold. LMI is therefore paid by you to insure your lender against loss should this happen.
This fee is charged based on a home loan above 80% of the purchase price and is a percentage of the home loan amount. The higher percentage and amount you borrow, the higher the LMI premium.
LMI is usually paid as a one-off lump sum at the time of settlement but in many cases it can also be added into the loan amount and paid off over the life of the loan – a term known as capitalising the LMI.
Two ways to avoid Lenders Mortgage Insurance:
- Save more money, have more than 20% deposit of the total property purchase (including government charges and other costs)
- Get a Family Guarantee
Is Mortgage Insurance a bad thing?
Not necessary!
If it means you only need to save 5% plus costs and you can get into your home earlier, it’s a premium most people are willing to pay.
Do I need mortgage Insurance?
In some cases lenders may require LMI for lower LVR loans, depending on the type and style of property you’re purchasing – for example some inner-city apartments or rural land.
Use our All-In-One Mortgage Calculator to work out if you will need to pay the lenders mortgage insurance, if so, how much. Or speak to a Mortgage Specialist.
