Lenders mortgage insurance (LMI) is one way of getting into home ownership without having the 20% deposit which is typically required by most banks and financial institutions.
With LMI, lenders may allow you to borrow a higher proportion of the purchase price, allowing you to purchase a property with a smaller deposit than would otherwise be required. It may also enable you to borrow at an interest rate that is comparable to a borrower who has a larger deposit.
LMI should not be mistaken for mortgage protection insurance, which covers your mortgage in the event of death, sickness, unemployment or disability. LMI protects your lender against a loss should you, as a borrower, default on your home loan.
If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, your lender is entitled to make an insurance claim to the LMI provider for the reimbursement of any shortfall. Where a claim for loss is paid to a lender, the LMI provider may seek recovery from the borrower, or any guarantor, for any shortfall amount.
How do I know if I need to pay LMI?
Usually if you have less than 20% deposit your lender will require LMI for the loan, the cost of which is passed on to you as the borrower. However, if you are confused it is recommended that you contact your lender who will advise you if your loan requires LMI. If you are required to pay the cost of LMI, your lender will prepare all the necessary documentation.
How much does it cost?
There is a one-off premium payable for LMI, the cost of which is passed on to you as the borrower. The premium is payable when the loan is approved and it provides the lender cover for the full term of the loan. Some lenders will allow you to add the cost of the LMI premium on to your loan, meaning you will not have to pay this amount upfront. Your loan repayments will increase marginally to cover the cost of the LMI premium.
The cost of LMI varies depending on a number of factors, including but not limited to, the amount of the loan, the level of your equity in the security property (how much of your own savings you contribute to the purchase) and the level of risk associated with the particular loan product you choose.
Can I avoid it?
Yes you can if you save for a larger deposit. However, if the market is strong housing prices could rise, and so paying for LMI now could be cheaper than the paying the extra amount needed to secure a property in a year’s time.
Is the premium refundable?
A partial refund of the LMI premium may be applicable if the loan is repaid within the first two years. Sometimes a partial refund is not payable as a lower LMI premium may have been charged to you upfront. This varies by lender, so please speak to your lender to find out what arrangements they have in place.