What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (“LMI”) is one way of getting into homeownership without having the full 20% deposit which is typically required by most banks and financial institutions.

With LMI, lenders may allow you to borrow a higher proportion of the purchase price, allowing you to purchase a property with a smaller deposit than would otherwise be required. It may also enable you to borrow at an interest rate that is comparable to a borrower who has a larger deposit.

LMI should not be mistaken for Mortgage Protection Insurance, which covers your mortgage in the event of death, sickness, unemployment or disability. LMI protects your lender against a loss should you, as a borrower, default on your home loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan. Should this be the case, your lender is entitled to make an insurance claim to LMI insurer for the reimbursement of any shortfall. Where a claim for loss is paid to a lender, the insurer may seek recovery from the borrower, or any guarantor, for any shortfall amount.

The LMI is added directly to your home loan in most cases, so it’s not a fee you need to pay upfront.

Can it be avoided? Yes, you can save for a bigger deposit, but in some circumstances saving for a larger deposit may not be an option. A larger deposit means you’d borrow less and therefore pay less interest over the course of your loan, but it also means delaying your purchase.

If the market is strong prices could rise, and so paying LMI now could be cheaper than the extra dollars needed to secure a property in a year’s time. That’s a choice you can make with your financial advisor, and it will be an estimate at best.