May 16, 2023 by Simone Ruddock
Lenders Mortgage Insurance, or LMI for short, is a type of insurance that is commonly required by lenders when a borrower is taking out a home loan with a deposit of less than 20% of the property's value. It is a one-off payment made by the borrower that provides protection to the lender in the event that the borrower defaults on the loan.
When a borrower has a deposit of less than 20% (+ costs) of the property's value, they are considered to be a higher risk for the lender. This is because they have less equity in the property and therefore, if they default on the loan, there is a higher chance that the lender will not be able to recover their losses through the sale of the property. To mitigate this risk, lenders will often require borrowers to take out LMI.
LMI is usually calculated as a percentage of the loan amount and can vary depending on a number of factors, including the size of the deposit, the loan amount, the property's location, and the borrower's credit history. It is important to note that LMI is not the same as mortgage protection insurance, which provides protection to the borrower in the event that they are unable to make their loan repayments due to illness, injury, or death.
It's important to note, this insurance is to cover the lender and does not cover you as a borrower.
One of the benefits of LMI is that it can help borrowers to secure a home loan with a smaller deposit, allowing them to get into the property market sooner. Without LMI, many borrowers would be unable to meet the 20% deposit requirement and may be forced to delay their home ownership goals.
While LMI is an additional cost for borrowers, it is often a more affordable option than saving up for a larger deposit. It can also be added to the loan amount, which means that borrowers do not have to pay the full amount upfront.
There are current Government schemes in place for First Home Buyers or Single Parents which should they qualify, allows them to purchase with as little as 2% deposit without paying Lenders Mortgage Insurance. For more information CLICK HERE.
For more information about how this relates to your personal situation or if you have any questions please give us a call on 0457 006 022 or click the red ‘Speak to us’ above.
