Demystifying Lenders Mortgage Insurance (LMI)

September 21, 2016 Posted by Finance Detective Blog

You may have heard us speak about Lenders Mortgage Insurance in previous articles (like: What you need to know about Lenders Mortgage Insurance).

What is it again?

Lenders Mortgage Insurance (LMI) is designed to protect the lender when the borrower requires a higher than usual percentage of the value of the property. It protects the lender in the case that the borrower (you) cannot meet 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.

Update
Up until recently, if you don’t have a 20% deposit saved, you would need to purchase lenders mortgage insurance to enable you to pay LMI to enable you to purchase the property. In the current market some lenders will now lend up to 85 % of the value of the property before requiring Lenders mortgage insurance. So the good news is that you now may only require a 15% deposit to avoid paying lenders mortgage insurance.

The upside

However, there are upsides to lenders mortgage insurance. The insurance can allow you to borrow up to 95% of the property’s value and the cost of the insurance gets added to the loan. By reducing the deposit required, you may be able to afford that home earlier or purchase a slightly better property than first thought.

If you do have a deposit of 15% or more, then you have the choice of whether to borrow more, using your available funds for other priorities such as furnishings or renovations.

For property investors, lenders mortgage insurance allows borrowers to have higher borrowing ratios, giving them the opportunity to maximise negative gearing benefits.

Note: It is important to emphasise that lenders mortgage insurance does not protect you as the borrower and is not to be confused with mortgage protection insurance, which can cover you for the payment of your mortgage in the event of unforeseen circumstances.

Are you wondering if using LMI is the right thing for you?

At Finance Detective, we can work through your specific situation so you can make an informed decision.