A basic guide to understanding lender’s mortgage insurance

Published on November 26th, 2020
  Written by 
Bill Tsouvalas
Bill Tsouvalas is the managing director and a key company spokesperson at Savvy. As a personal finance expert, he often shares his insights on a range of topics, being featured on leading news outlets including News Corp publications such as the Daily Telegraph and Herald Sun, Fairfax Media publications such as the Australian Financial Review, the Seven Network and more. Bill has over 15 years of experience working in the finance industry and founded Savvy in 2010 with a vision to provide affordable and accessible finance options to all Australians. He has built Savvy from a small asset finance brokerage into a financial comparison website which now attracts close to 2 million Aussies per year and was included in the BRW’s Fast 100 in 2015 as one of the fastest-growing companies in the country. He’s passionate about helping Australians make financially savvy decisions and reviews content across the brand to ensure its accuracy. You can follow Bill on LinkedIn.
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If you are in the home loan market you might have come across a few phrases that leave you wondering “what does that mean?” unfortunately in such instances, ignorance is not bliss. Not knowing what a term means can have financial repercussions. It pays to ask. Research suggests that 40% of home loan borrowers have no idea what Lender’s Mortgage Insurance (LMI) means and we are here to help clear things up for you.

What is Lender’s Mortgage Insurance?

When it comes to buying a house the general rule of thumb is that you need to have 20% of the deposit ready to pay towards a loan. However, if you haven’t been able to save up for a 20% deposit but want to close in on a property that could soon go off the market Lender’s Mortgage Insurance will come into play (LMI). It is a condition that is compulsory for all borrowers who do not have the 20% deposit but want to purchase a house. LMI is designed to protect the lender in the event where you (the borrower) are unable to meet the home loan repayments after signing the loan agreement.

How does it work?

Should a borrower fail to meet the monthly repayments on the loan that they have taken out from the lender, LMI will kick in which protects the lender from such events. The lender will be able to make a claim if a borrower defaults on a loan. LMI allows the protective barrier that lenders need to borrow out larger amounts to people who do not have a 20% deposit ready. When you apply for a home loan LMI is already applied to the loan, so you do not have to worry about an up front fee. It is important that you read the terms that are included in a policy to get a clearer picture of how LMI will affect you.

The cost of Lender’s Mortgage Insurance will differ

There is no set amount that is applied to loans that come with a Lender’s Mortgage Insurance attached to it. This will differ depending on various factors such as; the size of the loan, how much of the deposit you have ready, the type of property it is, and your employment status to list a few. However, if you are planning on borrowing 95% of the properties value from a lender you should reconsider as this will be a greater risk to you financially. The lower the amount of the deposit you have to offer up front, the higher the LMI on your loan can be pushed up. This could create financial stress when it comes to repaying the loan.

You will be better off waiting to have an adequate deposit ready than to rush into getting a mortgage that will have you paying through your nose.

Can I get a refund on my premium if I pay the loan off early?

This will vary from lender to lender. However, it will most likely be based on your circumstances. A partial refund can be applied on a case by case basis and can be available in the first 1-2 years.

What if I am no longer able to meet my mortgage repayments?

You will have to contact your lender immediately. The sooner you do this the easier it will be for both you and your lender to find a repayment plan that will work for your current situation. Some lenders will waive the premiums and till you are financially stable, but this can only be done if they are told in advance.

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This guide provides general information and does not consider your individual needs, finances or objectives. We do not make any recommendation or suggestion about which product is best for you based on your specific situation and we do not compare all companies in the market, or all products offered by all companies. It’s always important to consider whether professional financial, legal or taxation advice is appropriate for you before choosing or purchasing a financial product.

The content on our website is produced by experts in the field of finance and reviewed as part of our editorial guidelines. We endeavour to keep all information across our site updated with accurate information.

Approval for home loans is always subject to our lender’s terms, conditions and qualification criteria. Lenders will undertake a credit check in line with responsible lending obligations to help determine whether you’re in a position to take on the loan you’re applying for.

The interest rate, comparison rate, fees and monthly repayments will depend on factors specific to your profile, such as your financial situation, as well as others, such as the loan’s size and your chosen repayment term. Costs such as broker fees, redraw fees or early repayment fees, and cost savings such as fee waivers, aren’t included in the comparison rate but may influence the cost of the loan. Different terms, fees or other loan amounts may result in a different comparison rate.

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