Lenders mortgage insurance: protection for me or the bank?
Lenders mortgage insurance (LMI), also known as private mortgage insurance (PMI), is a way for lenders to protect themselves if the borrower can no longer pay the mortgage and defaults on the loan.
LMI is similar to mortgage protection insurance but shouldn’t be confused with this product. Mortgage protection insurance covers the mortgagee when they are unable to make repayments due to unforeseen circumstances. Income protection insurance covers disruptions to your income due to injury or illness. LMI, however, is protection for the lender in the event of default.
If a home owner is unable to maintain repayments on their loan and foreclosure occurs, the house will be sold, often at auction. However, in many cases, the property will sell for less than the outstanding loan amount. Lenders mortgage insurance will cover this shortfall, ensuring the lender is not out of pocket.
Do I need lenders mortgage insurance?
LMI is often a requirement stipulated by lenders when a borrower buys a property with less than a 20 percent deposit. The lower the deposit, the more risk the lender is exposed to and the higher the probability of default.
Lenders mortgage insurance is only available for residential properties as purchases of business and industrial properties generally require the purchaser to have a deposit greater than 20 percent anyway.
If you are prepared to pay for lenders mortgage insurance, there are advantages for purchasers. As a smaller deposit is acceptable, you can borrow more money. You may also have more lenders to choose from when selecting a home loan product so you have access to a greater range of competitive loans. Home loan interest rates can also be kept lower as the risk to lenders is minimised.
By allowing purchasers to borrow greater amounts at lower rates, LMI makes it possible for borrowers to enter the property market earlier or buy a better property than they would otherwise be able to afford.
How much does LMI cost?
Lenders mortgage insurance is usually charged as a once-only premium, taken out at the same time as your home loan. The amount charged is dependant upon the size of the deposit and the total loan amount.
In most cases, the LMI premium is charged as an upfront lump sum, however some lenders will allow borrowers to remit the premium in instalments with the loan repayments.
LMI also attracts GST, which is included in the total premium quoted. Stamp duty may also be payable, depending on the Government regulations in the State or Territory you are applying in. Any stamp duty will also be included in the quoted premium.