Not to be confused with mortgage protection insurance (which is designed to protect the borrower), LMI is insurance that covers the lender's risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily.
Subscribe now for unlimited access.
or signup to continue reading
LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit, allowing for an additional fee to be paid by the borrower and usually applies when the loan is more than 80 per cent of the purchase property's price.
The purpose of LMI is to ensure security for the lender in case the borrower fails to make loan repayments.
Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.
The cost of the premium is dependent on several factors, such as the loan size and property value and is usually added to the loan amount, and included in monthly repayments.
It is not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.
The beauty of LMI is that it buys time ...
WHAT'S IN IT FOR ME?
While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium.
Opting for LMI means it allows a borrower to independently purchase a property sooner than they otherwise might.
LMI is the alternative to using a guarantor or having to save for a bigger deposit, both of which are not feasible options for many first home buyers.
A deposit of at least 20 per cent of the desired loan amount is required for a borrower not to be deemed 'high-risk'.
For a home being purchased at $450,000, that would mean a deposit of around $90,000 would be required.
The beauty of LMI is that it buys time, which means borrowers with smaller deposits are able to enter the market sooner rather than later.
The major benefit of LMI is that it allows the dream of home ownership to become a reality for a lot of first home buyers.
HOW TO AVOID LMI
If you don't have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a security guarantor for your loan.
A close relative, such as a parent or sibling, may be eligible to act as a guarantor and they use the equity in their property to help you secure yours and keep your total loan below 80 per cent.
In some instances, having a guarantor on your loan may mean that you won't need a deposit at all.
Arrange for an appointment today to discuss your individual circumstances and options.
