What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (or LMI) is an insurance policy that is paid for by the borrower but obtained by the lender to protect the lender against any losses that may occur where:
· the borrower defaults on their loan;
· the lender sells the security property; and
· there are inadequate funds to cover the outstanding loan and any fees and charges that may have accrued.
LMI will normally not cover penalty interest, early repayment penalties, the LMI premium, physical damage to property and fees and charges not directly related to costs incurred by the lender in order to recover the debt
LMI insurers may refund a portion of the LMI premium if the insured loan is fully repaid within 12 months of the settlement date.
LMI may be applicable for both owner occupied and investment loans. In addition to the borrower needing to satisfy a credit provider’s criteria, they also need to meet the requirements of the mortgage insurer. In many cases an application may meet the lending guidelines of the credit provider, but fail to meet the mortgage insurer’s guidelines, in which case the credit provider may decline the loan application.
When is LMI required on a loan?
LMI is usually required by a lender when the loan requested exceeds 80% of the value of the security property. This is referred to as the loan-to-value ratio or LVR. Some lenders may allow higher LVR’s without LMI or waive the requirement for certain occupations (i.e. doctors, lawyers or other professionals).
How much does LMI cost?
The LMI premium is based on a sliding scale of LVR and loan amount, where the higher the LVR and bigger the loan amount, the higher the premium. LMI premiums can be substantial and must be factored into the overall cost of borrowing to ensure there is not a shortfall of funds when it comes to settling a loan. It is usually a one-off payment made at the start of the loan.
Some lenders allow borrowers to add the LMI premium to the loan amount; however, interest will accrue on the total loan balance including the LMI premium, which will increase the overall loan repayments and cost of the loan.
Is it worth paying for Lenders Mortgage Insurance?
LMI can be worth paying in circumstances where you don’t have the time to save extra deposit and wish to enter the property market. This could be in a market where you believe property values will rise quicker than you can save further deposit or you are able to negotiate a purchase below current value.