Home Loans and Lenders Mortgage Insurance

Lenders Mortgage Insurance (LMI) protects the lender in the event that a mortgage borrower defaults on their loan. Not all home loans require LMI, only those for which there was a small deposit put in by the borrower.

In the past, mortgages were only given when the borrower had a reasonable deposit. The usual minimum amount for a deposit was 20% of the cost of the property. This was done to reduce the risk to the lenders. If the borrower defaulted on the loan the lender could recover their funds by selling the property at a reduced price.

This is no longer true, as many lenders issue mortgages far exceeding the 80% historical maximum loan to value ratio. To offset the risk, lenders take out an insurance policy against the balance of the loan above 80% of the value of the property. That way, if the loan goes into default, the lender can recover some of the balance of the mortgage from the insurance company.

Although the LMI protects the lender, it is paid for by the borrower by way of a lump sum payment. While many types of insurance policies allow for regular monthly payments, the LMI premium must be paid for when the mortgage is taken out. However, LMI is usually required on home loans for people who cannot afford to pay for a large deposit. To counter this, the LMI premium is usually allowed to be tagged on to the mortgage balance.

The lender will usually have a commercial arrangement with one insurance company with whom they put all their LMI cases to. This means that you or your mortgage broker will not be able to shop around for an insurance company if you want to apply for a home loan with a particular lender. The lender will also apply for the LMI for you – there is no need for you to apply separately.

Lenders mortgage insurance covers only the lender for losses. This policy should not be used as a replace for other insurances needed when owning a home. You as the borrower will not receive any real benefit from the LMI except that you won’t have to pay for a large deposit. You should therefore take out other insurance policies to guard against other losses from property ownership.

Being approved for LMI is not the same as being approved for a home loan. The lender will still assess your application as normal even if you already qualify for LMI.

If you need to borrow more than 80% of a property’s value you should contact a mortgage broker. They will be able to select a lender which will offer the most beneficial home loan and the cheapest LMI to suit your particular circumstances.

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