When you are purchasing a home and require a home loan, you have probably come across the term Lenders Mortgage Insurance (LMI). In this article, we will explore what LMI is and how it works.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of insurance that protects the lender when a borrower defaults on their home loan. It is usually required when the borrower has a deposit of less than 20% of the property’s value.
The insurance premium is paid by the borrower and is a one-time payment at the start of the loan. The premium amount is usually added to the loan amount, so the borrower doesn’t need to pay it upfront.
How Does Lenders Mortgage Insurance Work?
When a borrower takes out a home loan with less than a 20% deposit, the lender is taking on more risk. In case the borrower defaults on the loan, the lender may not be able to recover the full amount owed by selling the property. That’s where Lenders Mortgage Insurance comes into play.
Lenders Mortgage Insurance provides a guarantee to the lender that if the borrower defaults on the loan, the insurer will pay a portion of the outstanding balance. This reduces the lender’s risk, and they can offer the home loan to the borrower with a smaller deposit.
How Much Does LMI Cost?
The cost of Lenders Mortgage Insurance depends on several factors, including the loan amount, the deposit amount, and the borrower’s credit score. Typically, the LMI premium is a percentage of the loan amount, and it varies from 1% to 5% of the loan amount.
For example, if you are taking out a home loan of $400,000 with a deposit of 10%, the LMI premium could be around $9,600. This amount is usually added to the loan amount, which means you will be paying interest on the premium as well.
Who Pays for LMI?
The borrower is responsible for paying the LMI premium, but it is usually added to the loan amount. This means that the borrower doesn’t need to pay the premium upfront, but they will be paying interest on the premium amount as well.
When is LMI Required?
Lenders Mortgage Insurance is usually required when the borrower has a deposit of less than 20% of the property’s value. This is because the lender is taking on more risk, and the LMI provides a guarantee to the lender that they will be covered if the borrower defaults on the loan.
However, some lenders may require LMI even if the borrower has a deposit of more than 20%. This may be because the lender considers the borrower to be a higher risk due to their credit score or employment history.
Can LMI be Refunded?
Lenders Mortgage Insurance is usually non-refundable, meaning that once you have paid the premium, you cannot get it back. However, some lenders may offer a partial refund if the loan is paid off early, or if the property is sold and the loan is repaid in full.
What are the Benefits of LMI?
The primary benefit of Lenders Mortgage Insurance is that it allows you to purchase a home with a smaller deposit. This can be beneficial if you are struggling to save a large deposit, but you have a stable income and can afford the loan repayments.
Another benefit of LMI is that it can help you avoid paying Lender’s Mortgage Insurance (LMI) premium or other fees associated with a low deposit home loan. This can save you thousands of dollars in the long run and make it easier to manage your finances.
What are the Risks of LMI?
The main risk of Lenders Mortgage Insurance is that it adds to the cost of your home loan. You will be paying interest on the premium amount, which can add up over time. Additionally, if you default on your loan, the LMI premium will not protect you, only the lender.
Another risk of LMI is that it can be difficult to switch lenders or refinance your loan. If you have paid LMI, and you want to refinance your loan, you may need to pay LMI again with the new lender.
Final Thoughts
Lenders Mortgage Insurance can be a useful tool for borrowers who have a smaller deposit but want to purchase a home. However, it is essential to understand the costs and risks associated with LMI before taking out a home loan.
If you are considering a home loan with LMI, it is advisable to speak to a mortgage broker or financial advisor who can help you understand your options and find a loan that suits your needs.