What is Lenders Mortgage Insurance (LMI) and should you have it?
Actually, that’s kind of a trick question, since it is not your choice, and it is not for your protection!
Lenders’ mortgage insurance protects your lender in the unfortunate event of you defaulting on your home loan. But you, the borrower, pay for it. And it can cost several thousands of dollars. When lenders agree to lend a customer money, there is a small risk that they won’t get the money back if the customer is not able to meet the repayments. Although they have the house as security, if property values decline that security may not be enough to cover the outstanding loan when the lender comes to sell it.
This insurance helps lenders broaden the net of who they are able to lend to by taking some of the risk out of lending the money. It means that more people are likely to get a loan and the home they want sooner (to put a positive slant on it!).
LMI is payable if the Loan-to-Value-Ratio (LVR) is greater than 80%, ie you are borrowing more than 80% of the value of the property. The higher the LVR, the higher the cost of the LMI. If you are borrowing less than 80% of the value of the property, there is no LMI premium payable.
To calculate the likely LMI premium payable at your value and borrowing levels, you can use the calculator at this link.
Lenders’ mortgage insurance should not be confused with mortgage protection insurance, which covers borrowers for the payment of their mortgage installments in the event of unforeseen circumstances including unemployment, illness or death. This insurance is paid annually and can vary depending on the outstanding balance of the loan.
For further details or specific advice regarding your own situation, contact your bank/broker, and/or conveyancer/solicitor.