What is lenders mortgage insurance?
Not to be confused with mortgage protection insurance (which is designed to protect the borrower), lenders mortgage insurance (LMI) 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 mortgage 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 property’s purchase price.
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 mortgage lender.
The cost of the LMI 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 LMI fee depending on how much equity the borrower has available to them.
What’s in it for me?
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 have. 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 home loan amount is required for a borrower not to be deemed ‘high-risk’. For example, if you consider that the average price of a home in Sydney is $1 million dollars, that would mean a deposit of around $200,000 is required. The beauty of LMI is that it buys time, which effectively means borrowers with smaller deposits are able to enter the property market sooner rather than later.
The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers. To see if this is the case for you, speak to your trusted Mortgage Broker today.
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