Lenders Mortgage Insurance
What is Lenders Mortgage Insurance (LMI)?
Lender’s mortgage insurance is an insurance policy obtained by the lender, but paid for by you the borrower. It is for the protection of the lender, and not you the borrower.
The LMI policy protects the lender against any losses where:
- the borrower defaults on their loan;
- the lender sells the security property; and
- there are not adequate funds to cover the outstanding loan and to cover any fees and charges that may have accrued.
LMI is usually taken by the lender when the value of the loan requested exceeds 80% of the value of the security property. In simple terms if you dont have a 20% deposit plus funds to cover the fees then lenders mortgage insurance will apply.
How is Lenders Mortgage Insurance Calculated?
The lenders mortgage insurance (LMI) premium is based upon a sliding scale depending upon the loan to value ratio (“LVR”), the higher the LVR, the higher the premium. LMI premium can be substantial, and must be factored into the overall cost of borrowing to ensure there is not a shortfall of fund when it comes to settle a loan transaction.
What is Not Covered by Lenders Mortgage Insurance?
Lenders mortgage insurance will normally not cover penalty interest, early repayment penalties, LMI premium, physical damage to the property and fees and charges not directly related to the costs incurred by the lender in order to recover the debt.
Can I Get a Refund on LMI Premium?
Lenders Mortgage Insurance companies may refund a portion of the LMI premium if the facility insured has been fully repaid within 12 months of advancement of funds.
What are the Lenders Mortgage Insurance Guidelines?
LMI is available for both owner occupied and investment loans. In addition to the borrowers needing to satisfy the lender’s criteria, they must also meet the requirements of the mortgage insurer.
In many cases an application may meet the lending guidelines of the lender, but fail to meet the mortgage insurer’s guidelines, in which case the lender will decline the loan.
Some lenders may allow borrowers to add the LMI premium to the loan amount, which in effect allows the applicant to borrow in excess of the stated loan to value ratio (LVR).
How do I Avoid Paying LMI?
There are three ways to avoid paying LMI.
- The borrowers will be required to save or have a minimum of 20% deposit plus fee’s to keep the loan to value ratio at no more than 80%.
- A guarantor can assist in providing additional security to reduce the loan to value ratio to 80% in order to avoid paying LMI.
- Additional security in the form of another property where the overall loan to value ratio remains below 80%.
Want to find out if your loan requires LMI?