March 18, 2015
Lenders Mortgage Insurance (LMI) is an additional cost to borrowers where they are borrowing more than 80% of the property value (LVR). Lenders impose this additional cost as they believe the higher the LVR, the greater the risk to them; so in effect the borrower is paying the LMI cost to cover that perceived risk.
Some lenders will add the full cost of the LMI premium to the base loan amount, in other cases it must be paid by the borrower upfront, similar to the payment of stamp duty.
Importantly, LMI protects the lender - not you - if you can't keep up the repayments and the lender ultimately incurs a loss on the loan. However without LMI, many potential home buyers with only a small deposit wouldn't be able to secure a home loan. So whilst a bigger deposit will reduce, or avoid LMI, it can allow borrowers to purchase their property sooner.