What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) is a type of insurance that protects mortgage lenders in the event that a borrower defaults on their home loan and the proceeds from the sale of the property are not enough to cover the outstanding loan balance. It is typically required if you have a deposit less than 20% of the property's purchase price.
How does Lenders Mortgage Insurance work?
When you obtains a home loan with a deposit of less than 20%, the lender may require you to pay LMI as a one-time premium. This insurance policy is taken out by the lender and protects their interests by covering a portion of their potential losses if the borrower defaults on the loan.
For instance, if a borrower purchases a property worth $400,000 with a 10% deposit ($40,000), they would need to borrow $360,000. Since the deposit is less than 20%, the lender may require the borrower to pay for LMI. If the borrower defaults on the loan and the property is sold for $380,000, leaving a shortfall of $20,000, the LMI would cover a portion of this shortfall, reducing the lender's losses.
Why pay Lenders Mortgage Insurance?
Less deposit: LMI enables borrowers to purchase a home with a smaller deposit, thereby making homeownership more accessible, sooner, especially for first-time buyers.
Reduced risk for lenders: By mitigating the risk of financial loss for lenders, LMI encourages them to offer home loans with lower deposit requirements, expanding the pool of potential borrowers.
Faster loan approval: LMI can facilitate quicker loan approval processes since it provides additional security for lenders, potentially expediting the home buying process for borrowers.
Cost of Lenders Mortgage Insurance
The cost of LMI might vary by lender and depends on the loan amount, the loan-to-value ratio (LVR), and the insurer's premium rates. Generally, the premium is calculated as a percentage of the loan amount and can be paid upfront or added to the loan.
In summary, while Lenders Mortgage Insurance adds an additional cost to borrowers, it plays a crucial role in facilitating homeownership by providing lenders with a safeguard against potential losses associated with higher-risk loans, ultimately benefiting both borrowers and lenders in the housing market.