LMI - What is it and what does it do?
• Lender’s Mortgage Insurance (LMI) is one way of getting into home ownership without having the 20% deposit which is typically required by a home loan lender.
• LMI is a one-off premium, payable upfront when a home loan is settled. This is charged by the third-party insurer to the lender and this cost is recovered from the borrower.
• A lender will require borrowers to pay a LMI premium when they have less than a 20% deposit for a home loan. There may be other situations where LMI is involved.
• If a lender were to default on their home loan and the lender incurs a loss after selling the property, LMI policy protects the lender from any loss. In this situation, borrowers may need to pay the insurer the amount outstanding.
Is LMI the same as Mortgage Protection Insurance?
LMI should not be confused with Mortgage Protection Insurance. Mortgage Protection Insurance covers the borrower's mortgage repayments in events such as unemployment, death or disability. The policy will typically be in the interest of the lender and may mean your debt is paid out or reduced before any residual is paid to the borrower. Policies are typically expensive for the limited terms offered. Typically is a poor choice in comparison to offers from retail offers for Life, Disability, and Trauma that provide comprehensive cover.
Who is insured?
It is important to note that the policy does not insure the borrower. LMI covers the lender for any shortfall that may be incurred if you fail to repay your loan and if the property sale proceeds are less than the loan amount.
How does LMI provide a benefit ?
LMI reduces lender’s risk of providing a home loan when you have less than a 20% deposit. It means that home ownership can be achieved much earlier for many Aussies that would have otherwise struggled many years to save the 20% deposit.
How is the cost calculated?
The premium is based on the loan divided by the loan amount and multiplied by the risk factor expressed as a percentage and Stamp Duty and GST added.
How is it paid?
LMI a one-off upfront payment. You can choose to pay this through your own funds or add this amount to your home loan. In many situations, the LMI is added on top of the loan. In this situation, it means the lifetime cost of the loan will be more.
Is the premium refundable?
No, the premium is not refundable.
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