What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a one-off insurance payment which protects your bank from a default on your home loan.
If you borrow more than 80% of a property’s value you will most likely pay LMI, as it is generally a condition of the loan. This type of insurance protects the lender when the borrower cannot meet the loan repayments and the enforced sale of the property fails to cover the repayment of the loan. It does not protect you, the borrower.
Why should the borrower pay to insure the lender?
Upfront it may look like there are no benefits to LMI for the borrower. Put simply, LMI helps a lender to reduce the risk of providing a home loan. A reduction in risk can allow the lender to loan a larger amount, or approve a home loan without the borrower having to provide a 20% deposit. In turn, LMI provides borrowers the opportunity to purchase a home with a deposit under 20% of the property value (minimum 5%). This means rather than save for a few more years, or pay higher interest rates, you may be able to get that loan now.
What is the cost of LMI?
The cost of LMI varies. It is based on the percentage of the property value and the loan amount. The premium can also vary depending on whether your contribution is made up of genuine savings or has come from other sources, such as a gift.
LMI is a one-off, non-refundable fee which is paid when your loan settles. For most lenders, the LMI fee is capitalised (included in the loan amount). If the home loan amount includes LMI, the borrower will pay interest on the total loan and it will increase the minimum monthly loan repayments. Each lender has their own policy regarding when LMI is required and how much it will cost.
When a borrower refinances their loan, the LMI premium is not transferable. If LMI is required on a new loan, a new premium must be paid.
Are you looking to purchase or refinance your home today. Call Leonard on 0420 544 268 to see how LMI might benefit or impact you.