If you’re planning to purchase a home, you might have heard of lenders mortgage insurance (LMI). But what exactly is it, and how does it work? In this article, we’ll take a closer look at LMI, its purpose, and how it can affect your homebuying process.
What is Lenders Mortgage Insurance?
Lenders mortgage insurance is a type of insurance that protects lenders in case borrowers default on their mortgage payments. It’s typically required when a borrower’s deposit is less than 20% of the property’s purchase price.
When a borrower takes out a mortgage, the lender is taking on a certain level of risk. If the borrower defaults on their payments, the lender could lose a significant amount of money. LMI helps to mitigate this risk by providing a safety net for the lender.
How Does Lenders Mortgage Insurance Work?
When a borrower takes out a mortgage and their deposit is less than 20% of the purchase price, the lender will typically require them to pay for LMI. The cost of LMI can vary depending on the size of the deposit and the lender’s requirements.
LMI is a one-off payment that’s usually added to the borrower’s mortgage. It can be paid upfront, but most borrowers choose to add it to their mortgage to spread the cost over time.
If the borrower defaults on their mortgage payments and the lender is unable to recover the full amount owing, LMI can help to cover the lender’s losses. The lender will make a claim to the LMI provider for the amount of the loss, and the provider will pay out the claim if it’s approved.
Who Needs Lenders Mortgage Insurance?
Lenders mortgage insurance is typically required when a borrower’s deposit is less than 20% of the property’s purchase price. This is because the lender is taking on a higher level of risk when they lend to borrowers with smaller deposits.
If you’re planning to buy a home and your deposit is less than 20%, you’ll likely need to pay for LMI. However, some lenders may have different requirements, so it’s important to check with your lender to see if LMI is required.
What Are the Benefits of Lenders Mortgage Insurance?
While lenders mortgage insurance can add to the cost of buying a home, it can also provide a number of benefits for borrowers and lenders alike.
For borrowers, LMI can help them to get into the property market sooner. Without LMI, borrowers would need to save a larger deposit before they could buy a home. LMI can also help borrowers to avoid paying a higher interest rate, which is often charged to borrowers with smaller deposits.
For lenders, LMI helps to reduce the risk of lending to borrowers with smaller deposits. By providing a safety net for the lender, LMI enables them to lend to a wider range of borrowers than they might otherwise be able to.
What Are the Drawbacks of Lenders Mortgage Insurance?
While there are benefits to lenders mortgage insurance, there are also some drawbacks that borrowers should be aware of.
Firstly, LMI can add a significant amount to the cost of buying a home. This can make it harder for borrowers to afford their mortgage repayments, as they’ll need to factor in the cost of LMI on top of their regular mortgage payments.
Secondly, LMI doesn’t protect borrowers in the event of default. If a borrower defaults on their mortgage payments and the lender is unable to recover the full amount owing, the borrower may still be liable for the remaining debt.
How Can You Avoid Paying Lenders Mortgage Insurance?
If you’re looking to avoid paying lenders mortgage insurance, there are a few options available to you.
Firstly, you could save a larger deposit. If you can save 20% or more of the property’s purchase price, you won’t need to pay for LMI.
Secondly, you could consider a guarantor loan. With a guarantor loan, a family member or friend agrees to guarantee your loan, which means they’ll be liable for the debt if you default on your payments. This can help you to avoid paying for LMI.
Conclusion
Lenders mortgage insurance is a type of insurance that protects lenders in case borrowers default on their mortgage payments. It’s typically required when a borrower’s deposit is less than 20% of the property’s purchase price. While LMI can add to the cost of buying a home, it can also provide benefits for both borrowers and lenders. If you’re planning to buy a home and your deposit is less than 20%, it’s important to factor in the cost of LMI when budgeting for your mortgage payments.