What is the point of Lender's Mortgage Insurance?

1. What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a one-time insurance premium that protects the lender if the borrower can't keep up with their home loan payments. It's generally needed when a homebuyer has a deposit that's less than 20% of the property's purchase price.

2. Why do lenders require LMI?

Lenders ask for LMI to help manage the financial risk when lending to borrowers who have a smaller deposit. If someone can't keep up with their loan and the property sells for less than what's owed, the lender can turn to the insurance provider to cover the difference.

3. Why does LMI only benefit the lender?

LMI is really there to keep the lender safe from financial loss, not the borrower. If you happen to miss your home loan payments and the property sale doesn't cover what's owed, the lender can use the insurance to cover the gap. But keep in mind, you'll still be on the hook for any leftover debt, even after the lender gets their share. LMI doesn't offer any financial or repayment protection for you as the borrower.

4. When do I need to pay LMI?

LMI is usually required when the Loan-to-Value Ratio (LVR) exceeds 80%, meaning the borrower has less than a 20% deposit. The cost is typically added to the home loan or paid upfront at settlement.

5. How is the LVR calculated?

LVR is calculated using the formula:

LVR = (Loan Amount / Property Value) x 100

For example, if a borrower is purchasing a property worth $500,000 with a $50,000 deposit, their loan amount is $450,000. This results in an LVR of 90%, which means LMI would likely be required.

6. How much does LMI cost?

LMI costs vary based on the lender, loan amount, and LVR. It can range from a few thousand dollars to tens of thousands. The premium is usually higher for loans with higher LVRs.

7. Can I avoid paying LMI?

Yes, there are several ways to avoid or reduce LMI:

• Save a larger deposit: A 20% deposit eliminates the need for LMI.
• Use a guarantor loan: A family member can provide additional security, reducing the LVR.
• Government schemes: The First Home Loan Deposit Scheme (FHLDS) helps eligible buyers purchase with a 5% deposit without paying LMI.
• Certain professions: Some lenders waive LMI for specific professions (e.g., doctors, accountants, and lawyers).

8. Does LMI protect me as the borrower?

No, LMI only protects the lender. If you default on your loan, you are still responsible for any shortfall even if the lender claims against the LMI policy. LMI does not offer any financial relief to borrowers in financial distress.

9. Can LMI be refunded if I pay off my loan early?

In most cases, LMI is non-refundable, even if you refinance or pay off your loan early. Some insurers may offer partial refunds under specific conditions, so it’s worth checking with your lender.

10. Why bother with LMI?

• to access the property market sooner with a lower deposit requirement
• to expand your property portfolio without needing a large upfront payment
• to transition from renting to homeownership by starting to build equity

11. Should I speak to a finance broker about LMI?

Absolutely! A finance broker is great for helping you explore your home loan options, figure out potential LMI costs, and find ways to reduce or even skip it. Getting some expert advice means you'll be making smart choices about your home loan and financial responsibilities.

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