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What is lenders mortgage insurance?

November 24, 2020

Lenders mortgage insurance or LMI is a once-off insurance fee paid by the banks and other lenders to cover their risk if a mortgage goes bad.

Should a borrower default on a home loan the lender may move to force the sale of the property. If the bank does not recover the full amount of the outstanding loan from the fire sale of the property, the mortgage insurer will cover any shortfall for the bank.

It is important to note that LMI doesn’t cover a borrower who defaults on a mortgage. Instead, if a home buyer is borrowing more than 80% of the purchase price of a property or group of properties, they will be liable to pay LMI as protection for the lender.

The pros of LMI

LMI effectively underpins the stability of our lending system as it protects a bank, credit union or online lender against a loss. Apart from this, LMI allows borrowers to borrow up to 95% of the value of a property. Without LMI, the banks would not be comfortable with the risk involved in lending over 80% and up to 95% to a home buyer. On the other side of the coin, many borrowers, particularly first-time buyers, would be excluded from the market without LMI. Meanwhile, the government and regulators impose limitations on the banks if they don’t charge clients for LMI costs over 80%.

Borrowers with smaller deposits can get into a property and this is one of the important benefits of the LMI regime. Moreover, the advent of LMI replaces the old system where the bank would give a borrower two loans – one for 80% and another for the balance as a personal loan on a much shorter term. This often meant that borrowers were highly stressed having to pay both the mortgage and the short-term personal loan that would usually charge a much higher interest rate.

The upshot is that home loan repayments are much lower under LMI, and some lenders even offer LMI discounts or reductions for first home buyers or professional groups such as doctors. LMI also enables first time buyers to get into the market sooner as they don’t have to wait to have 20% of the purchase price in savings.

Other considerations with LMI

The rub with LMI is that it adds cost to the home loan and the repayment, while the banks’ lending policies can be much stricter when buyers are borrowing more than 80% of the purchase price. Moreover, some lenders will charge a higher interest rate for loans over 80% of the purchase price.

To find out more about LMI and how it can help you meet your home loan goals sooner, contact Our Broker on 1800 913 677