Lenders mortgage insurance (LMI) is a special type of insurance that banks and other lenders use to help borrowers who can’t pay a large initial deposit. When lenders offer loans to borrowers with smaller deposits, it increases the lenders risk. That’s why lenders use this one-off insurance premium so they can offer you a bigger home loan. If you are currently researching home loans, the information below will help you to better understand LMI.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a type of insurance that a bank or any other financial institution uses to protect itself if you can’t pay back the full loan. The LMI will protect the lender if you default on the loan and you don’t meet your monthly home repayments.
Usually, the lender will sell the property to recover the rest of the home loan. When this happens, the LMI provider will pay any shortfall between the money from the sale of the property and the outstanding loan balance.
What is the Main Purpose of LMI?
The purpose of LMI is to protect the lender not you or your guarantor. It makes it easy for the lender to recover any amount left if the income from the sale of the house does not fully cover the unpaid balance on the home loan.
Well-known home loan providers like Lendi, Canstar and Aussie Home Loans can connect you to lenders that offer loans to low income earners. Lenders will take LMI any time they decide to provide a home loan that is over 80% of the total property value.
While the home itself can serve as a security for your loan, the interest and cost of default may not be covered after the lender sells the property. This is usually true when the property prices drop below the original purchase price or remain stagnant for a long time.
What are the Benefits of Lenders Mortgage Insurance?
LMI offers a number of benefits to the lender and the consumer.
* Loans for Low Income Borrowers: You pose a higher risk to the lender, when you are a low income earner. But LMI makes it possible for you to gain access to a loan even with your low equity status.
* Faster Loans: If you need to save to make a 20% down payment, your loan approval and processing of your application may be delayed. But if your lender has LMI, you may be allowed to get your loan without an initial deposit.
* Lower Risk for Lenders: The mortgage insurer helps your lender to cut down risk. You can obtain your loan without any large deposit. Consequently, your lender can offer you a loan at a relatively low interest rate.
How much will LMI cost you?
Your lender pays the mortgage insurer for the LMI and then passes the full cost to you. The cost varies from one lender to another depending on the value of the loan and amount of money you deposit. It is usually about 2% of the loan excluding stamp duty.
In some cases, your lender will add the premium to the loan amount. But some lenders will ask you to pay it before you start paying the interest and capital of the loan.
You can get details of the LMI cost and repayment plan from your lender. You may also get a rough estimate of the cost of LMI you will need to pay by using an online home loan calculator.
Note that if you refinance and get a different loan or a new lender, your previous LMI will not be transfered. So you may need to pay it once again if you borrow more than 80% of the property’s value.