LMI (Lender’s mortgage insurance) is nothing but insurance that protects the lender against the borrower’s inability to make repayments (should such a situation arise) and a possible shortfall if the property sale does not cover the loan amount. In other words, if the borrower can’t repay the loan (due to several reasons like illness, death, loss of employment etc.), the insurance organisation compensates the lenders. Lenders usually require borrowers to buy LMI when their home loan deposit is less than 20% of the property cost. Here’s our take on some crucial aspects to keep in mind about LMI.
Who does LMI protect?
Though LMI is bought and paid for by the borrower, it is designed to protect the lender. If the borrower can’t repay the loan, the insurance provider takes charge of the property and is responsible for its sale and any loan shortfall. If you are looking to protect your ability to make loan repayments, consider ‘Mortgage protection Insurance’ as a borrower. This type of insurance offers protection to the borrower. To know more, click HERE.
How does LMI benefit the borrower?
Though LMI protects the lender’s interests, it does offer a significant benefit to the borrower in the form of an opportunity to buy a property with a lower deposit. It, therefore, lets prospective buyers climb onto the property ladder sooner.
How is LMI calculated?
LMI usually costs between 1% and 2% of the property price. The final cost of LMI depends on many factors, but the main ones are:
- Property Cost: The higher the property cost, the greater risk and therefore the higher the LMI cost.
- Deposit Amount: There’s an inverse relationship between your home loan deposit amount and LMI cost. The higher your deposit, the lower your LMI cost
- Property Type: Some lenders perceive an owner-occupied property as lesser of a risk and therefore charge a lower price for its LMI.
Other factors that affect the cost of your LMI include the insurance provider and your employment status (Full time or contract/temporary). The cost of your LMI is usually added to your overall loan amount.
Can I skip LMI?
There are ways to avoid buying LMI despite having a less than 20% home loan deposit.
- FHLDS (First Home Loan Deposit Scheme): This scheme allows first home buyers to secure a home loan with just a 5% deposit. The government bears the cost of the LMI. For more information, click HERE.
- Getting a Guarantor: A guarantor uses equity from his/her property as collateral to secure a loan for the borrower. This means that if the borrower cannot keep up with repayments, the lender reaches out to the guarantor for payments or takes control of the equity used as collateral. Learn more HERE.
- Your profession: Doctors, lawyers and accountants (CA or CPA certificate holders) can secure a home loan with just a 10% deposit without paying for LMI.
What happens to your LMI if you Refinance?
LMI is lender specific. So, if you switch lenders, you will have to change your LMI provider and purchase a new policy. The cost of your new LMI may be more. If you have a home loan that has an LMI attached to it, be sure to check the price of your new LMI policy while refinancing.
Do you need to pay for LMI throughout the life of your loan?
LMI is necessary only when the equity in the property is less than 20%. As the value of your property appreciates and you begin to pay off your home loan, your equity in the property increases. Once your equity touches 20%, you do not need to pay for LMI anymore.
The most straightforward approach to taking a call on LMI is to rely on the professional guidance of a mortgage broker. Brokers get paid a commission by the lender for settling a loan, and their services are usually free for borrowers. In addition to scope the market for the right loan match, your broker will also handle all your paperwork.
Reach us for the best way forward as per your circumstances.
The information is a compilation from various sources for your benefit and should not be relied upon in lieu of appropriate professional advice.