What is LMI?

Aspiring home owners who are taking out a mortgage for the first time may have heard of Lenders Mortgage Insurance (LMI) but might not be entirely clear on what it is and how it works. In this blog post, we'll explain what LMI is and what it means for home buyers.

Lenders Mortgage Insurance (LMI) is a type of insurance that is designed to protect lenders in case a borrower defaults on their mortgage repayments. It is typically required by lenders when a borrower is taking out a mortgage and has a deposit of less than 20% of the property's value. LMI is a one-off payment that is paid by the borrower and is typically added to the mortgage amount.

The purpose of LMI is to reduce the risk for lenders when they are lending to borrowers with a lower deposit. It’s basically an insurance premium that you pay for.

If a borrower with a low deposit defaults on their mortgage, the lender may be unable to recover the full amount of the loan by selling the property. In this case, the LMI provider will pay the lender an amount to cover the shortfall.

It's important to note that LMI is not the same as mortgage protection insurance, which is designed to protect borrowers in case they are unable to make their mortgage repayments due to illness, injury, or job loss. Mortgage protection insurance is a separate policy that borrowers can choose to take out, and is not required by lenders.

While LMI is designed to protect lenders, it can also benefit borrowers. By allowing borrowers to take out a mortgage with a smaller deposit, LMI can help more people enter the property market. Without LMI, many people may be unable to purchase a home because they do not have a large enough deposit.

However, it's important to understand that LMI can be expensive. The cost of LMI can vary depending on factors such as the size of the deposit and the value of the property, but it can often add thousands to tens of thousands of dollars to the cost of a mortgage. It's also important to note that LMI is a one-off payment, and cannot be cancelled or refunded.

While LMI can help more people enter the property market, it can also be expensive, and borrowers should carefully consider the cost before deciding whether to take out LMI by borrowing above a 80% LVR.