Lenders Mortgage Insurance (LMI)

[Guest Carol from Vista Financial]

What is it?

Lenders Mortgage Insurance or LMI is an insurance policy that protects the bank from financial loss if you can’t pay your loan back.

LMI cover protects the lender, and you pay the premium. That’s right, you are paying to protect the bank from yourself!

 

When/why is LMI applicable?

Normally LMI is required if you request to borrow more than 80% of the property value, as this is deemed riskier to the lender.

Why? You’ve put less money in, your repayments will be higher, and they have more to lose. So, they hedge their bets by insuring themselves.

If you default on the loan (i.e. don’t/can’t pay), they will chase you for the funds. If that doesn’t work and as a last resort, they will re-possess and sell the house to pay the debt.

If the sale of the property isn’t enough to pay the outstanding debt, the lender makes a claim with the insurer to recover the difference.

(Important to note – even if the lender gets all the money back from the sale or insurer, this is doesn’t absolve you from your debt – there is sadly no get-out-of-jail-free card.)

 

How much is it?

LMI can be very expensive. The cost is determined by a number of factors including the loan to value ratio (i.e. how much you are borrowing compared to the purchase price), the size of the loan you want (costs increase exponentially), if you are a first home buyer or not, and the insurer. The two main insurers in Australia are QBE and Genworth, but some lenders also self-insure.

You can get a rough idea on the cost of LMI here, but take it with a grain of salt as it does vary between lenders.

 

How do you pay for it?

You can pay it upfront or most lenders will allow you to add this to the home loan amount (i.e. capitalise it). Most people opt to add it to the loan.

 

Why on Earth would you choose to pay LMI?

Saving a 20% deposit is very hard, and can be almost impossible for some. LMI enables you to purchase without having to have 20% deposit, so is actually quite a popular option.

 

How to avoid LMI?

Save like crazy to have a 20% deposit.

If not, there may be other options, including gifted funds from the Bank of Mum and Dad or using a guarantor.

For a lucky few LMI waivers sometimes exist with some lenders – normally restricted to those in the medical profession or specific white-collar professions. Normally strict criteria apply.

 

Important fact to remember

LMI protects the lender, it does not protect you!

As a borrower, this type of insurance does not offer you any protection whatsoever.

LMI is often confused with mortgage protection insurance - a type of insurance that protects you if you lose your job/fall ill and can’t meet a repayment. This is a completely different insurance, so note the difference.

If you still have any questions regarding LMI, get in touch so I can help.