What Is Lender's Mortgage Insurance?

What Is Lender’s Mortgage Insurance?

Finance

Original authors: Regina Collins and Christine Thelander 

 

Saving for a home is no mean feat. On top of your home loan deposit amount, there are a number of additional costs you may have to factor in before you can step onto the property ladder. Depending on how much of a deposit you have, one potential cost you may need to consider is lender’s mortgage insurance (LMI).

 

LMI was thrown into the spotlight during this year’s federal election, when the Liberal party announced (and Labor promised to match) a First Home Loan Deposit Scheme. This would allow 10,000 eligible first-time homebuyers a year to get an LMI-free loan with a deposit of as little as 5%. Under the proposed $500 million scheme, the government would guarantee the shortfall needed to reach a 20% home loan deposit. According to the government, this could save eligible buyers around $10,000 in LMI costs. 

So what actually is LMI? How much does it cost? And when will you have to pay it?

What is LMI and how does it work?

LMI is an insurance policy that some borrowers need to pay for. The purpose of LMI is to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.

If the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference. 

Many people believe that LMI is designed to protect the borrower in the case of loan default, but this is actually mortgage protection insurance, which is a different product. The true purpose of LMI is to protect and potentially benefit the lender. Additionally, by reducing the risk to the lender, LMI can allow banks and other financial institutions to lend larger amounts and approve more home loan applications.

If your lender requires you to take out LMI, it can typically be paid upfront or capitalised into (added to) your home loan. Either way, LMI premiums are typically non-refundable. This means if you switch your loan to another provider in the future, you generally won’t be able to transfer your LMI to another lender, and depending on the situation you may have to pay for a new policy through the new lender. 

Lender's Mortgage Insurance LMI
Source: 4 PM production (Shutterstock)

When is LMI required?

Generally a lender will require you to pay for LMI if your home loan deposit is less than 20% of the total value of your property – or in other words if your loan-to-value ratio (LVR) is more than 80%. However, as different lenders may have different rules, it could be worth checking what each individual lender’s policy is.

If you’re looking to avoid paying LMI but you don’t have much of a deposit saved up, you may be better off not entering the housing market just yet, and waiting until you have saved up the 20% deposit that is generally required to avoid paying LMI.

Compare Home Loans

READ  Asbestos and Mesothelioma Lawsuits: What to Expect

5-Star Rated Home Loans on Canstar’s database

If you’re in the market for a new home loan, the table below displays a snapshot of some of the outstanding value variable and fixed rate home loans on our database with links to lenders’ websites. This is sorted by comparison rate (lowest-highest) and then alphabetically by provider name. Products shown are principal and interest home loans available for a loan amount of $500K in NSW of 85% LVR of the property value. Choose between the First Home, Next Home, Investing and Refinance tabs to view results most relevant to you. Bear in mind that loans with an LVR of more than 80% may attract LMI and may impact the interest rate. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm these factors and whether the terms of the loan meet your needs and repayment capacity. *Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning. Use Canstar’s home loan selector to view a wider range of home loan products.

Sharing is caring

Related posts:

HOW TO PLAN YOUR BUDGET TO ATTAIN FINANCIAL FREEDOM
How to Take a Loan - 15 Tips Before Taking a Loan
THE DIFFERENCE BETWEEN WEALTH AND POVERTY
Asbestos and Mesothelioma Lawsuits: What to Expect
7 ACTUAL REASONS WHY AFRICANS ARE POOR
How To Overcome The Spirit Of Poverty And Debt
5 Real Benefits Of Health Insurance
NIGERIA REQUESTED SATISFACTION OF 5 CONDITIONS BEFORE SHE WILL ADOPT THE ECO CURRENCY FOR ECOWAS
4 Personal Loan Tips That Will Pay Off
11 SECRETS TO BECOMING RICH, SUCCESSFUL, AND HAPPY
THE MAN WITH SEVEN THOUSAND PRIVATE CARS
DISCOVER HOW PROPHET BUSHIRI MAKES MONEY? HERE ARE THE TOP 10 WAYS
10 Best Insurance Tips for 2020
4 Key Secrets Of Investment To Become Successful
5 FINANCIAL RISKS EVERY BUSINESS SHOULD AVOID
South African Pastor Arrested As Miracle Money Turns Back Into Pieces Of Papers
10 reasons Africa is poor from my perspective
14 TIPS TO BECOME HAPPIER AND MORE SUCCESSFUL
Mesothelioma Lawsuit
How can I become rich in a poor country?
Why is my gas and electricity bill so high?
10 Basic Principles of Financial Management
13 MONEY MISTAKES YOU MUST AVOID IF YOU WANT TO BE SUCCESSFUL
7 SECRETS TO BECOMING WEALTHY IN YOUR 20S AND 30S
IDENTIFYING AND ESCAPING POVERTY
THE IMPORTANCE OF PROBLEMS IN ACHIEVING SUCCESS
8 Ways to Get the Cheapest Car Insurance Rates Possible
Learn How Loans Work Before You Borrow
10 TIPS TO BE SUCCESSFUL
10 CRITICAL THINGS TO CONSIDER BEFORE APPLYING FOR A LOAN
How To Become Rich by Prophet Shepherd Bushiri – Major 1
THE PAINFUL TRUTH BEHIND “THE MONKEY BUSINESS” STORY

Leave a Reply

Your email address will not be published. Required fields are marked *