December 08, 2014
Lenders Mortgage Insurance (LMI) is an insurance premium that is required should a borrower have less than 20% deposit. It is typically required by most banks and financial institutions and allows borrowers to purchase a home sooner, rather than continuing to save the full 20% deposit.
With LMI, lenders may allow you to borrow a higher percentage of the purchase price and still offer a competitive interest rate that is comparable to a borrower who has the full 20% deposit.
Who is insured?
LMI insurers the lender and should not be mistaken for mortgage protection insurance, which covers your mortgage in the event of death, sickness, unemployment etc.
LMI does not insure the borrower nor any guarantor and if a claim is paid to a lender, the insurer may attempt to recover any shortfall from the borrower or guarantor.
Why is LMI required and what are the benefits?
Purchasing your dream home is an exciting and an extremely rewarding experience however, it can be a challenge due to the amount of time it can take to save a 20% deposit. This is where LMI can assist.
LMI allows the borrower to purchase property with as little as 5% deposit therefore, reducing the time to save the traditional 20% deposit and the timeframe to home ownership. LMI reduces the risk to the lender and takes much of the difficulty out of saving a 20% deposit.
How much does LMI cost?
The exact cost of LMI varies depending on a number of factors such as:
- the loan amount being sought
- the level of savings to be contributed by the borrower
- the risk associated with the loan product chosen
- the type of security and location
LMI is a premium charged to the lender and then passed onto the borrower. This premium can generally be added to the loan amount with the loan repayments increased marginally to cover the cost. Check out the Mortgage Choice LMI estimator calculator here for the cost of your premium.
The LMI charge is only paid once on the drawdown of the loan funds (i.e. at settlement) and provides cover for the full term of the loan.
If you are looking to apply for a home loan in the near future or have any questions regarding the home loan application process including LMI, please call Ashley on 0425 826 967 or 9432-2121.