When you’re buying a home, it’s common to hear about mortgage insurance, but what about lenders mortgage insurance (LMI)? This component of mortgage insurance is often misunderstood, but it’s essential to understand it to make informed decisions when purchasing a property.
What is Lenders Mortgage Insurance (LMI)?
Lenders mortgage insurance is a type of insurance policy that protects lenders from financial loss if the borrower defaults on their mortgage. This insurance is typically required when the borrower has a deposit of less than 20% of the property’s value. The purpose of LMI is to reduce the risk associated with lending to borrowers who have a high loan-to-value ratio.
How Does LMI Work?
LMI is paid by the borrower but protects the lender. If the borrower defaults on their mortgage, the lender can make a claim on the LMI policy to recover their losses. The cost of LMI is typically added to the mortgage and paid off over time, increasing the borrower’s monthly repayments.
Why is LMI Required?
LMI is required when the borrower has a deposit of less than 20% of the property’s value. This is because lenders consider borrowers with a high loan-to-value ratio to be at a higher risk of defaulting on their mortgage. By requiring LMI, lenders can reduce their risk and provide more loans to borrowers who may not have a large deposit.
How Much Does LMI Cost?
The cost of LMI varies depending on the lender, the loan amount, and the loan-to-value ratio. Generally, the higher the loan-to-value ratio, the higher the cost of LMI. The cost of LMI is typically a one-time payment or added to the mortgage and paid off over time.
Is LMI Worth It?
Whether LMI is worth it depends on your individual circumstances. If you have a small deposit and want to buy a property, LMI may be the only way to secure a loan. However, if you have a larger deposit, the cost of LMI may not be worth it. It’s important to weigh the cost of LMI against the benefits of owning a property and make an informed decision.
How to Avoid LMI?
The only way to avoid LMI is to have a deposit of at least 20% of the property’s value. If you can’t afford a large deposit, there are other ways to reduce the cost of LMI. For example, you could consider buying a cheaper property or saving a larger deposit to reduce the loan-to-value ratio.
Conclusion
Lenders mortgage insurance is an often-misunderstood component of mortgage insurance, but it’s essential to understand it when buying a property. LMI protects lenders from financial loss if the borrower defaults on their mortgage and is typically required when the borrower has a deposit of less than 20% of the property’s value. The cost of LMI varies depending on the lender, the loan amount, and the loan-to-value ratio. Whether LMI is worth it depends on your individual circumstances, and it’s important to weigh the cost against the benefits of owning a property.