Understanding Lenders Mortgage Insurance

Preparing to purchase your own home can be one of the most exciting times in your life. It also comes with a huge challenge, in having to save a deposit that some lenders require – typically 20% of the home’s purchase price.

Without a substantial deposit, your lender may still be prepared to provide you with a home loan with a deposit of as little as 5% if they take out Lenders Mortgage Insurance¹.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is an insurance policy that a lender takes out to protect itself against the risk that the borrower defaults on their loan repayments and the lender is unable to recover the full outstanding loan amount. Simply put:

• The LENDER protects itself with Lenders Mortgage Insurance
• The BORROWER can buy a home much sooner, with a smaller deposit

LMI protects your lender, not you

It’s important to note that Lenders Mortgage Insurance does not protect the borrower or any guarantor you may have. It shouldn’t be confused with Mortgage Protection Insurance, which is a separate insurance policy to protect you (the borrower) if you find yourself in a situation where you can’t make repayments on your loan.

How does LMI help you?

By reducing the deposit the borrower is required to provide, Lenders Mortgage Insurance can help you obtain a home loan that might have not otherwise been available. This means you can:

• Buy your new home sooner and stop paying rent; or
• Buy a more expensive property with the deposit you already have.

It can also help you borrow at an interest rate that is comparable to a borrower who has saved a more substantial deposit.

A one off cost

Lenders Mortgage Insurance is arranged by your lender, with the premium being a one-off cost that your lender pays to the insurer upon settlement of your property purchase. This cost is passed on to you by your lender, as a one-off fee.

Your lender will explain how much your LMI premium will cost after you apply for your loan. This will depend on various factors, including the size of your deposit and the type of loan you take out.

There are two main ways to cover the cost of your LMI premium. The first is by adding it to your home loan, which means you’ll pay interest on it over the term of your loan. The second is by paying it up front, before your lender activates your home loan.

Refunds

Often, the fee for your Lenders Mortgage Insurance can be partially refundable if your loan is terminated within the first two years.

However, if your lender has arranged to receive a larger up-front discount on its LMI premium instead of the right to a refund you may not receive a refund. If this is the case, the full amount of the discount your lender receives is passed on to you. This means that if you want to refinance your home loan with another lender or increase the amount of your loan, you may have to pay a Lenders Mortgage Insurance fee again.