What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is an insurance policy that protects the lender in case the borrower is unable to repay the loan. LMI is usually required when the borrower has a small deposit or less than 20% of the property value. It provides financial protection to the lender, allowing them to offer loans with a lower deposit requirement.
Why Do You Need Lenders Mortgage Insurance?
If you’re planning to buy a property with a small deposit, you may need LMI. LMI is a one-time payment that protects the lender in case you default on the loan. It allows lenders to offer loans with a lower deposit requirement, which means you can buy a property with a smaller deposit than you would otherwise need.
How Does Lenders Mortgage Insurance Work?
When you apply for a loan, the lender will assess your risk level based on your credit score, income, and deposit amount. If your deposit is less than 20% of the property value, the lender may require you to pay LMI. The cost of LMI is usually added to your loan amount. If you default on the loan, the lender can make a claim on the LMI policy to cover their losses.
Who Pays for Lenders Mortgage Insurance?
The borrower usually pays for LMI. The cost of LMI varies depending on the loan amount, deposit amount, and the lender’s risk assessment. The cost of LMI can be several thousand dollars, so it’s important to factor it into your budget when buying a property.
What Does Lenders Mortgage Insurance Cover?
LMI covers the lender, not the borrower. If you default on the loan, the lender can make a claim on the LMI policy to cover their losses. LMI does not cover the borrower’s repayments, so if you default, you may still owe money to the lender.
When Do You Stop Paying Lenders Mortgage Insurance?
You stop paying LMI when you have paid off enough of your loan that your equity in the property is at least 20% of the property value. This can be achieved by making repayments on your loan, or by the value of your property increasing. Once you have 20% equity, you can apply to have the LMI policy cancelled.
What Are the Benefits of Lenders Mortgage Insurance?
The benefits of LMI include:
- Allows you to buy a property with a smaller deposit
- Protects the lender in case you default on the loan
- Enables lenders to offer loans with a lower deposit requirement
- Can be cancelled once you have 20% equity in the property
What Are the Risks of Lenders Mortgage Insurance?
The risks of LMI include:
- Costs several thousand dollars
- Does not cover the borrower’s repayments
- Can make it harder to pay off your loan if you have a higher interest rate
- May limit your options if you want to refinance or sell your property
How Can You Reduce the Cost of Lenders Mortgage Insurance?
You can reduce the cost of LMI by:
- Increasing your deposit amount
- Choosing a lender with a lower LMI premium
- Applying for a loan with a lower LVR (loan-to-value ratio)
- Choosing a property in a lower-risk area
What Should You Consider Before Taking Out Lenders Mortgage Insurance?
Before taking out LMI, you should consider:
- The cost of LMI and how it will affect your budget
- The benefits and risks of LMI
- Whether you can afford the repayments on your loan
- Whether you have enough savings to cover unexpected expenses
What Are Your Alternatives to Lenders Mortgage Insurance?
Your alternatives to LMI include:
- Increasing your deposit amount
- Borrowing from family or friends to increase your deposit
- Choosing a lender that does not require LMI
- Applying for a government grant or scheme to help with your deposit
Conclusion
Lenders Mortgage Insurance is a financial protection product that covers the risk for lenders when borrowers have a small deposit. It allows borrowers to buy a property with a lower deposit requirement, but can also cost several thousand dollars. Before taking out LMI, it’s important to consider the benefits and risks, and whether you can afford the repayments on your loan. You may also have alternatives to LMI, such as increasing your deposit amount or choosing a lender that does not require LMI.