What is lenders mortgage insurance?

Protecting the lender

When banks lend more than 80% of your home value, they are taking a larger risk. Lenders mortgage insurance protects the lender if in the instance, you were unable to meet your repayment obligations.

For example, if you were to default on your home loan, the lender can recover what's owed to them by repossessing the property. If the value of the property has fallen, the lender can suffer a loss - this is the risk that lenders mortgage insurance covers. With the added protection, banks are more willing to lend a higher amount.

How it works

Let's assume you want to buy a house that's worth $500,000, to avoid lenders mortgage insurance you will need at least $100,000 (20%) deposit.

However, let's assume that you have sufficient income to support the loan, but you only have $25,000 (5%) deposit. In this instance, you can take advantage of lenders mortgage insurance, to secure your home sooner.

Because lenders mortgage insurance is reducing the banks risk, they will lend you the $475,000 (95%) you need to buy the property.

What are the benefits?

Saving for a large deposit can take years, particularly while renting. In addition, property prices may continue to increase, overtaking your ability to save.

The main benefits of LMI include:

The lender will lend up to 95% of your homes value
You can enter the property market with only 5% deposit
The insurance premium can be paid upfront or added to your loan

How much is LMI?

Lenders Mortgage Insurance will vary depending on the loan amount and percentage you borrow. The Lenders Mortgage Insurance premium is usually a one-off charge and can be included either in your upfront costs and paid immediately, or added to your loan repayments so that it’s spread out over the term of the loan.

Can I avoid LMI?

If you want to avoid paying lenders mortgage insurance, then you will need to;

Have a deposit of 20% or more
or purchase with the help of a Family Guarantor
or take advantage of the Government Home Guarantee Scheme

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