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What is lenders mortgage insurance and how can it get you into a home sooner?

By Andrew Bell

Lenders Mortgage Insurance (LMI) is insurance that covers your mortgage lender (a bank or other financial institution) against the risk of not recovering the full loan balance if you become unable to meet your loan payments. An LMI covers the lender – not you as the homebuyer – although you are responsible for the premium. Around one in five of all Australian mortgages are insured with an LMI provider.

What LMI is

If you meet all of your potential lender’s requirements except you don’t have the size of deposit they want, you may be able to convince them to lend to you by getting LMI. With the extra security of an LMI, most lenders are willing to accept a smaller down payment on a residence, especially for first time home buyers.

Benefits of LMI

LMI can give you greater access to home ownership, especially if you are a low income, low equity or higher-risk borrower who might have trouble getting a home loan. The LMI gives the lender a sense of security, as it assures them that they can still recoup their losses if something happens and you stop making payments and default. This keeps them from having the same level of risk they would accept by allowing you to simply get the loan with a very low deposit. An LMI can help you get into a home more quickly, shaving a year or two off the time it would take for you to save more money for your down payment. You can potentially be approved for your home loan with a 10% or 15% deposit instead of a 20% deposit.

How LMI works

Lenders mortgage insurance will protect your lender against financial loss if you default on your home loan. The property can still be repossessed and sold, at which point the insurance will kick in to cover the amount left to pay on the loan (applicable if the sale price doesn’t completely pay off the lender, which is often the case). The LMI carrier can then come after you to try and recoup their own losses. If you are having trouble making your mortgage payments, you need to contact your lender as soon as possible and try to arrange an agreement for adjusted repayment on grounds of financial hardship rather than default.

The cost of LMI

In many cases, the lender actually purchases the LMI at settlement, and then passes the cost on to you, either as a lump sum cost or as a small increase in your monthly mortgage. The cost varies depending on the lender, how much you borrowed and the size of your deposit. You can use an online LMI calculator to estimate potential premium costs. Since the risk is passed from the mortgage issuer to the mortgage insurer, in some cases, you can even get a lower interest rate if you apply for a home loan with LMI.

Refinancing with an LMI

You can’t transfer an LMI policy to another lender. If you refinance, you need to make a new loan and mortgage arrangement. If you are borrowing more than 80% of your home’s value, you’ll likely need to purchase LMI again. If you paid your LMI in full, you may be entitled to a pro-rated refund if it has only been a year or two since your original home purchase. Remember, your lender usually pays the LMI premium up front, and passes those costs on to you, so if you agreed to pay them on a monthly basis as part of your mortgage bill, you may have to pay off the rest of the LMI as part of your loan restructuring.

For help finding your new home, contact Ray White Surfers Paradise.

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