Lenders Mortgage Insurance, what is it and do I need it?
Below is a fact sheet that explains lenders mortgage insurance (LMI) and provides answers to some commonly asked questions.
What is lenders mortgage insurance?
Lenders mortgage insurance (LMI) is one way to buy a home without having the 20 per cent deposit which is typically required by most banks and financial institutions. With LMI, lenders may allow you to borrow a higher proportion of the purchase price, allowing you to purchase a property with a smaller deposit than would otherwise be required. It may also enable you to borrow at an interest rate that is comparable to a borrower who has a larger deposit.
Who is insured?
The lender is the insured party, not you, the borrower, nor any guarantor. Where a claim for loss is paid to a lender, the LMI provider may seek recovery from you, or any guarantor, for any shortfall amount. LMI should not be mistaken for mortgage protection insurance, which covers your mortgage in the event of death, sickness, unemployment or disability.
Why does my loan require LMI and how can it benefit me?
Achieving the dream of home ownership is, for many people, one of the most exciting accomplishments in life. It can also be one of the most difficult challenges due to the length of time it takes most people to save the traditional 20 per cent deposit and the sacrifices they make through the process.
By reducing a lender’s risk at the outset, LMI allows borrowers to secure a loan for a home, or even their second home or property, with a deposit as low as five per cent. This takes much of the difficulty out of saving a deposit.
What costs are involved?
Unlike traditional insurance products, there is a one-off premium payable for LMI. This premium is charged by the LMI provider to the lender, who typically passes this cost on to the borrower. The premium is payable when the loan funds are advanced and it provides cover for the full term of the loan.
The cost of LMI varies depending on a number of factors, including but not limited to, the amount of the loan, the level of your equity in the security property (how much of your own savings you contribute to the purchase) and the level of risk associated with the particular loan product you choose.
Some lenders will allow you to add the cost of the LMI premium on to your loan, meaning you will not have to pay this amount up-front. Your loan repayments will increase marginally to cover the cost of the LMI premium.
Is the premium refundable?
A partial refund of the LMI premium may be applicable if the loan is repaid within the first two years. Sometimes a partial refund is not payable, as a lower LMI premium may have been charged to you up-front. This varies by lender, so please speak to your lender to find out what arrangements they have in place.
How is LMI arranged?
Your lender or broker will prepare all the necessary information and documentation and will advise you whether or not your loan requires LMI, the cost of the premium and any additional information that may be required.
What can I do if I’m having difficulty meeting my loan repayments?
A lot of people face unforeseen challenges in their life or their circumstances may change. This can often mean you may experience difficulties in meeting your loan repayments.
If this happens to you, the most important thing to do is to contact your lender immediately. There are a number of ways your lender can assist you if you are experiencing hardship, and it is best to contact them early.
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