What Is Lenders’ Mortgage Insurance?
Lenders’ Mortgage Insurance (LMI) is insurance that a lender takes out to protect itself against the risk of not recovering the full loan balance should you, the borrower, be unable to meet your mortgage repayments and the property is sold for less than the outstanding loan balance.
It is important to understand that LMI protects the lender, not you, the borrower or any guarantor.
Without a substantial deposit (usually 20%), it can be difficult to find a lender who will lend to you, even if you have stable employment and could meet the mortgage repayments.
With LMI a lender may be prepared to accept a smaller deposit and provide a home loan to you that may not have been otherwise available. Because LMI protects the lender it reduces the risk for the lender, making them more likely to lend to you even though you do not have a substantial deposit at the outset.
How Does LMI Benefit Me?
By reducing the time needed to build up your savings for a home loan, with a smaller deposit required, you could be in the property market quicker. This could also mean that you are able to stop paying rent earlier or you could buy yourself a bigger and better property to live in than you thought would be possible.
LMI Protects the lender, not you, the borrower.
In the unfortunate event your property needs to be sold to cover the outstanding loan amount and the house is sold for less than the amount of the remaining loan balance, leaving an amount still owing (this may be referred to as the ‘shortfall’). In accordance with the LMI policy, the LMI insurer will cover the shortfall to the lender. If this happens, you as the borrower are obliged to repay that outstanding amount of the loan or shortfall and the LMI insurer may then seek to recover the remaining debt from you, the borrower and any guarantors.
For Example:
Andrew borrowed $400,000 to buy a home valued at $475,000. His deposit was less than the lender requirement of 20%, so LMI was required and Andrew included the cost as a part of the loan.
Due to unforeseen circumstances, Andrew was unable to meet his loan repayments, defaulting on the loan. The property is sold.
The property sells for $300,000 which was less than the value of the outstanding loan amount. The shortfall was $75,000. Andrew remains obliged to pay this shortfall amount.
The lender makes a claim on the LMI policy and the LMI insurer pays the lender $75,000. The LMI insurer then has the right to seek repayment of the $75,000 from Andrew.
How Much Does LMI Cost And How Is It Paid?
The LMI premium is a once-only cost payable at the settlement of your home purchase. This one-off up-front payment provides cover for the life of the loan. Your lender will pass on the cost of the LMI premium to you by way of an LMI fee. Other establishment fees may also be charged by your lender.
The cost of LMI will vary depending on how much money you borrow and how much of a deposit you contribute from your own funds to the property purchase price. The more you contribute, the lower the cost of LMI. You may be able to include the costs of the LMI fee into your loan, so the cost of LMI will be added to your loan repayments over the term of the loan.
LMI is not the same as Mortgage Protection Insurance
LMI is not Mortgage Protection Insurance (MPI), which a borrower might separately take out to insure themselves against the risk of not being able to meet their loan payments, whilst LMI insures the lender if the borrower is unable to meet their loan repayments and the mortgage balance is greater than the property sale price.
Your Options In Financial Hardship
If you are suffering financial hardship or experiencing problems and you cannot make your home loan repayment on time you should immediately contact your lender. All LMI insurers have hardship policies in place.
Ask about LMI and your home loan options?
Contact any of our lending staff if you have any more questions or if you would like more information on LMI.
Learn more about LMI for Borrowers from LMI insurer QBE.