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House Loan Business Adventure

What Is Lenders Mortgage Insurance?

What is it?

Lenders Mortgage Insurance (LMI) protects the lender in the event that a mortgage borrower defaults on their loan. The insurance policy is only required for home loans that have a balance exceeding 80% of the value of the property at application.

Traditionally, home loans were only issued up to a maximum of 80% loan to value. This meant that the borrower needed to put down a deposit of at least 20% if they wanted to buy a home with a mortgage. This was done because the lower loan to value ratio resulted in a lower mortgage risk for the lender. In the case of default, the lender could repossess and sell the property at a discount to recover their funds.

Who is Covered by LMI?

However as time has gone by, some lenders have allowed people to borrow more than 80% of a property’s value. 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. Because LMI is usually take out by people who were unable to save for a deposit on their home, it is unlikely they will be able to pay an expensive premium as a lump sum. For this reason, many lenders allow borrowers to add the premium to the balance of their mortgage and pay it off over time.

Can You Shop Around for the Best Deal?

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 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.

LMI only insures the lender. It is not a replacement product for building or contents insurance, or for personal insurances such as life assurance and income protection. The borrower receives no benefit from the LMI, except for the fact they will not need to pay for a large deposit to buy a home. Borrowers should therefore seek to protect themselves from financial distress by way of a personal insurance policy.

Being approved for LMI is not the same as being approved for a home loan. If you are buying a home you will still need to meet the lender’s normal requirements in order to be approved for the mortgage.

If you are looking to take out a high loan to value mortgage on your property you should speak to 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.