July 10, 2015
Lenders Mortgage Insurance, or LMI, is there to protect the lender, not you, in case you default on your loan and they suffer a loss.
LMI is a requirement when you borrow more than 80% of the value of a property (the LVR, or Loan to Value Ratio, is above 80%). It is an insurance for the lender but the borrower pays the premium.
As an example, let's assume you borrow $380,000 for the purchase of a property worth $400,000 (LVR = 95%), you default on the loan which results in the lender needing to sell your property. Due to a downfall in the property market, the lender is able to sell for $365,000 so there is a shortfall of $15,000. The insurer who provided the LMI cover will pay to the lender their shortfall of $15,000. (Note that obviously we don't plan on defaulting on a loan but be aware in a case like this, the insurer may attempt to recover from you what they gave had to pay to the lender)
This video might help