What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance or LMI is insurance to protect the lender, not the borrower. As a general rule, all lenders will put a LMI policy in place on loans where the borrowings are greater than 80% of the property value and the policy premium is then passed onto the borrower.
There are insurances that borrowers should certainly consider to make sure they, or their family are not in financial distress should accident or illness occur. You can contact our Financial Advisor, Joshua Boctorani to find out more about these products and how they can be tailored to meet your specific requirements.
What is the origin of LMI?
LMI began in the US in the 1930's as a Government policy to promote home ownership and was then introduced into Australia by the Federal Government in the 1960's with the same intent. Indeed it was actually run by the Government through the Government owned Housing Loans Insurance Corporation (HLIC) until it was privatised in 1997 and purchased by GE Mortgage Insurance (now Genworth).
So which lenders use LMI?
In the early days of LMI it was mostly the smaller lenders (building societies and credit unions) who used LMI as it created a somewhat level playing field. The smaller lenders could have a competitive advantage by lending more money to borrowers and were not left holding all the risk.
However, since the early to mid 1990's pretty much all lenders now take advantage of LMI. Why is this? Well, quite simply it is becoming increasingly difficult to save a 20% deposit along with stamp duty and other associated costs. Borrowers want to borrow more than 80% of the property value and lenders want to lend more without carrying the associated risk.
It is also interesting to note that many credit unions and building societies will take out LMI on loans where the borrowings are less than 80% of the property value, but pay the premium themselves. It is only where the borrowings are greater than 80% that the premium gets passed onto the borrower. There are of course instances where the LMI premium can be waived at lending ratio's up to 85% or even 90% and we can provide more detail on this if you would like to give us a call.
How is the LMI premium calculated?
The LMI premium is calculated on a sliding scale, based upon the loan size and the Loan to Value Ratio (LVR, or your borrowings as a percentage of the property value). For example, if you were borrowing $200,000 at 82%, you could expect the LMI premium to be relatively low. However, if you were borrowing $750,000 at 95%, you could expect it to be very high.
If you want to know more about LMI, give the team at Mortgage Choice Concord a call on 02 8765 8700.