Lenders' mortgage insurance (LMI) protects your lender in the unfortunate event of you defaulting on your home loan. When lenders agree to lend a customer money, there is a small risk that they won't get the money back if the customer is not able to meet the repayments. Although they have the house as security, if property values decline that security may not be enough to cover the outstanding loan when the lender comes to sell it.
This insurance helps lenders broaden the net of who they are able to lend to by taking some of the risk out of lending the money. It means that more people are likely to get a loan and the home they want sooner.
Lenders' mortgage insurance should not be confused with mortgage protection insurance, which covers borrowers for the payment of their mortgage instalments in the event of unforseen circumstances including unemployment, illness or death. This insurance is paid annually and can vary depending on the outstanding balance of the loan. (source: QBE LMI)
When do you pay LMI?
LMI generally becomes payable if you put down less than 20% deposit on a full document loan or less than 40% deposit on a low document loan.
LMI is a once off payment made at the beginning of the loan. Most lenders let you add some/all of the LMI onto your loan. LMI is a percentage based on the amount of your loan. The percentage applied varies from lender to lender, is higher for higher loan amounts, and is also higher if you are putting down a lower deposit.
How does LMI benefit me?
Generally lenders would require a 20% deposit (40% on a low document loan). LMI helps lenders offer the same loans but for a lower deposit. They do this by passing some of the risk they take in lending money to purchase a home to an insurer.
This results in home loans being available to more people.