What is Lender Mortgage Insurance - LMI?

Lenders mortgage insurance (LMI) - Not to be confused with Mortgage Protection Insurance (which is designed to protect the borrower), LMI or Lenders Mortgage Insurance is insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily.

LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It allows an additional fee to be paid by the borrower and usually applies when the loan is more than 80 percent of the purchase property’s price.

Lenders mortgage insurance (LMI) is a type of insurance that protects lenders in case borrowers default on their mortgage payments. It is typically required when borrowers make a down payment of less than 20% of the home's purchase price. LMI can add to the cost of a mortgage, but it allows borrowers to purchase a home with a smaller down payment.

The purpose of LMI is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.

The cost of the premium is dependent on several factors, such as the loan size and property value, and most insurers are flexible when it comes to the method of payment. It can either be a one-off upfront premium payment or that premium could be included in the overall cost of the loan and included in monthly repayments. It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.

What’s in it for the borrowers?

While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might. LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.

A deposit of at least 20 per cent of the desired loan amount is required for a borrower not to be deemed ‘high-risk’. If you consider that the average price of a home in Melbourne is $650,000, that would mean a deposit of around $130,000 is required. The major benefit of LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later.

LMI can allow the dream of homeownership to become a reality for a lot of first home buyers. There are also ways to avoid it wit for example the First Home Loan Deposit Scheme or family guarantees.

Contact us if you have any queries and if you need to peak to us about your option.