This question is frequently asked by our clients. To help explain what Lenders Mortgage Insurance is and how it works we have set out below, answers to some of our most frequently asked questions.
Lenders Mortgage Insurance (LMI) protects your lender in the event of you defaulting on your home loan. In the event of a loan foreclosure, if the property is subsequently sold and the amount from the sale is not enough to repay the loan in full, this insurance will meet the shortfall for the lender.
LMI should not be confused with Mortgage Protection Insurance, which covers you for the payment of your mortgage instalments in the event of unforeseen circumstances, including unemployment, illness or death. This insurance is paid annually and can vary depending on the outstanding balance of the loan.
Who uses LMI??
Lenders Mortgage Insurance is taken out by Banks, Building Societies, Credit Unions and non-bank lenders.These institutions use the money from deposits held in savings accounts and term deposits, or borrow, to provide mortgages to customers. In agreeing to lend a customer money, banks take a risk that they won't get the money back. Although they have the house as security, if property values decline and security may not be enough to cover the outstanding loan. Because they operate in a very competitive environment, these lenders opt to take out LMI on these loans, rather than increasing interest rates, and let the LMI provider wear the risk.
LMI providers are heavily regulated by the government authorities to ensure they hold enough money in reserve in the event that a large number of customers default on their loans and claims increase substantially or unexpectedly.
How does LMI Benefit me??
Before LMI was available, lenders required a deposit of at least 20% to protect them in the event of foreclosure, where the property has to be sold at a price less than the outstanding amount of the loan. Now with the ability to pass on the risk of default to an insurance company through LMI, lenders have been prepared to accept a lower, or even no, deposit and also to offer lower rates for mortgage lending than they would otherwise be able to offer borrowers.
By reducing the deposit required and helping to minimize lending interest rates, many borrowers are able to purchase a home much earlier, or buy a better property, than they would otherwise have been able to afford before LMI.
Who pays the LMI Premium ??
The LMI provider's contract of insurance is with the lending institution and the premium is usually passed on to the borrower as a cost of providing the loan.
The loan were a deposit of less than 20%, or even no deposit, is required represents a higher risk to the lender than one where a traditional 20% deposit is paid. Lenders pass the cost of this premium on to the borrower as a sort of compensation for them now being able to obtain a loan, whereas previously would have had to have saved a much higher deposit.
How is the fee for Lenders Mortgage Insurance paid??
The fee, in most cases, is charged as a one-off premium. The amount will vary depending on how much money is being borrowed and the size of the deposit, if any.
How do I apply for LMI??
Your lender will prepare and provide all necessary documentation and information should your mortgage require insurance.
In order to qualify for LMI, your finance consultant, in conjunction with the lender, will check to ensure that you are able to make the repayments on your loan, and that your desired property meets the appropriate LMI underwriting guidelines.
We hope the above information has been helpful to better explain Lenders Mortgage Insurance, if you require additional information you can contact one of our experienced finance consultants at Toowoomba Home Loans who will be able to help you.
In fact, if you have any questions about mortgages, or are unsure about your own mortgage, whether you have the best loan for YOU just call us to arrange a time for a FREE no obligation consultation.
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