Lenders Mortgage Insurance

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance, or LMI for short, is insurance that protects the lender in the event that you default on your home loan. LMI is only applicable if your loan is a high risk to the lender, generally because you are borrowing a high percentage of the value of your property. It is paid as a once off insurance premium when your loan is advanced and has no affect upon your interest rate.

Why do banks get LMI?

Prior to 1965 lenders would only approve loans for up to 80% of the property value, which made it very difficult for first home buyers to get into the property market. Banks were reluctant to lend more than 80% because they were at risk that they would lose money if the loan was not repaid.

Lenders Mortgage Insurance allows banks to lend more than 80% of the property value because the insurer is taking on the risk of loss. This means that first home buyers or people with a smaller deposit can buy a home or investment property without the need for a 20% deposit.

Many home buyers see LMI as an unnecessary cost, however without Lenders Mortgage Insurance it would be unlikely that many Australians would ever save a large enough deposit to become home owners.

When do I need LMI?

As a general rule you will need LMI if you are borrowing over 80% of the property value with a normal home loan or over 60% of the property value with a low doc loan. The insurance is arranged by your lender or bank during your loan approval process so you don’t have to worry about any additional paperwork. In most cases your bank will use only one insurer and will not allow you to choose who insures your loan, even though the different mortgage insurers may have significantly different premiums.

When do I pay LMI?

You will pay the Lenders Mortgage Insurance Premium when your loan is advanced. Normally if you borrow $200,000 for example, the LMI Premium was $2,000 then the lender will just advance you $198,000 unless your premium is capitalised. Your LMI Premium is a once off fee, it is not an ongoing annual fee as it can be in some foreign countries.

Who is protected by LMI?

Mortgage Insurance does not protect you as the borrower, it only protects the lender. The insurance does not cover damage to the property being used as security for the loan which is usually covered under a building insurance policy. LMI should not be confused with Loan Protection Insurance or Mortgage Protection Insurance which covers the borrower in the event that they are unable to meet the loan repayments.

Does the insurer need to approve my loan?

The mortgage insurer will also need to approve your loan application. The bank will arrange this as part of their approval process. Mortgage Insurers are notoriously conservative because of the high risk associated with little to no deposit loans. As a result, they require borrowers to have a stable employment history, a perfect credit history and savings records.

Some lenders have a close relationship with their LMI provider and so have the ability to approve loans on behalf of their mortgage insurer. This is known as a Delegated Underwriting Authority (DUA) or Open Policy. The benefit of this to you as a borrower is that these lenders are often able to approve loans that would often be declined by their LMI providers!

Visit our Lenders Mortgage Insurance website for more information.