Lenders Mortgage Insurance

Lenders Mortgage Insurance is often referred to as LMI. It is insurance that a lender takes out to insure itself against the risk of not recovering the full loan balance if the borrower (you) were unable to meet loan repayments. LMI is a one-off fee charged by the Lender to you when you need to borrow more than 80% of the value of the property.

 

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Brodie Brown

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Meet Brodie Brown

If you’re looking to understand Lenders Mortgage Insurance and how it might affect your home loan, I can help you navigate your options. I’m Brodie Brown, Managing Broker here at BH Brown Mortgage Brokers. Based in Perth, we specialise in home loans for a range of different situations and work with clients right across Perth’s Western Suburbs.

Brodie Brown

The Property Investor’s Mortgage Broker

Benefits of Lenders Mortgage Insurance

  • The benefit of LMI is it allows lenders to provide home loans to customers who do not have a substantial deposit but would otherwise meet the lenders credit requirements.
  • LMI covers the outstanding balance of the loan owing to the lender if the sale of the property does not cover the total loan amount.

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Understanding LMI Costs and Payment Options

  • The LMI premium payable can either be included into the loan amount (called capitalisation of LMI) or paid upfront on settlement. The lender will be able to provide you the applicable costs of LMI.
  • It is important to note, if you choose to capitalise the LMI, your loan repayments are based on the higher loan amount which includes the LMI premium.
  • The cost of LMI will vary and it will depend on the lender, how much is borrowed and the size of the deposit.

LMI Refunds and Early Loan Termination

  • LMI may be partially refundable if the loan is terminated early, usually within the first two years.
  • Each lender will have their own refund arrangements.

What Happens if a Borrower Defaults and the Property is Sold?

  • If the borrower is unable to meet their loan repayments and there is no other resolution, the property may need to be sold to cover any outstanding loan amount.
  • The LMI insurer will pay the lender in accordance with their LMI policy and could then ask the borrower to repay this sum directly to them.
  • LMI does not protect you or cover your loan repayments in the event you are unable to make the repayments on your mortgage. You should discuss personal insurance options such as Mortgage Protection Insurance with your broker to cover any unforeseen circumstances.

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Refinancing and LMI Considerations

  • LMI is lender specific, which means if you refinance your home loan to a different lender and you borrow more than 80% of the value of the property, you will have to pay LMI again.
  • Do your research, as this may outweigh the benefits of refinancing to a lower interest rate.
  • If the equity in your home has increased or you have paid down the principal on your loan, you may not need to borrow more than 80% with the new lender and therefore avoid paying LMI again.

Case Study: Bob and Jill

Bob and Jill have found a home they want to buy for $500,000. Typically, they would need a 20% deposit ($100,000) to secure a loan from their lender. By taking out Lenders Mortgage Insurance, their lender is prepared to provide a loan up to 95% of the value of the home.

This means that Bob and Jill can secure a home loan sooner with a 5% deposit ($25,000) and stop paying rent. Their lender passes on the Lenders Mortgage Insurance premium cost to Bob and Jill by way of a fee called a “premium”.

The Lenders Mortgage Insurance protects the lender if Bob and Jill default on their loan repayments – it does not protect Bob and Jill.

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Important Information About Lenders Mortgage Insurance

Remember:

If variable rates increase, you may pay more interest than if you fix your rate. It will depend on the size of the increase(s), how far into the term the increase(s) occur, and how long you hold the loan after the increase(s) occur.

If variable rates stay flat or decrease, you will pay less interest than if you fix your rate. This is on the basis that your fixed rate is higher than the variable rate over the same period.

Rate Lock

Some lenders will provide you with the option of locking in the fixed rate prior to settlement occurring. This is referred to as “Rate Lock” and will involve paying a rate lock fee which will usually be calculated as a percentage of the loan amount.

This fee can be a significant amount, although some lenders will not charge a fee or may waive it.

How to Get Started

To get started, call us during business hours on 08-9433-1312 or submit an online enquiry and one of the team will review your request and schedule a time to discuss in more detail.

Book Your Free 10-Minute Finance Strategy Session

No cost. No obligation. Just straight-talking advice to help you build wealth faster.


Brodie Brown

As featured in:

west magazine
the-adviser