What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance (LMI) is a type of insurance that protects lenders—like banks or financial institutions—against the risk of not recovering the full amount of a home loan if the borrower is unable to keep up with repayments.
It’s important to note that LMI protects the lender, not the borrower or any guarantor involved.
LMI benefits consumers by allowing lenders to approve home loans for borrowers who meet lending criteria but might be declined due to having a smaller deposit.
In fact, around 20% of all home loans are backed by an LMI policy.
Frequently Asked Questions about LMI
Why is LMI beneficial?
LMI expands access to homeownership, especially for those with lower incomes, smaller deposits, or higher risk profiles who might otherwise struggle to secure a loan. It enables borrowers to get a loan earlier without needing to save a large deposit (usually 20% or more).
By shifting the risk to the insurer, lenders can offer loans with smaller deposits without necessarily increasing interest rates, potentially making loans more affordable.
What does LMI do?
Lenders Mortgage Insurance protects the lender from financial loss if the borrower defaults and the property is repossessed and sold. If the sale doesn’t cover the outstanding loan balance, the insurance covers the difference for the lender.
How much does LMI cost?
The LMI premium is paid at settlement by the lender but is typically passed on to the borrower. Costs vary depending on the loan amount, deposit size, and lender policies.
The premium can sometimes be included in the loan amount or paid upfront. Refinancing may require paying LMI again, especially if borrowing over 80% of the property’s value.
What happens if I default and the property is sold?
If you miss repayments and no alternative solution is found, your property might be sold to cover the debt. If the sale price doesn’t cover the loan balance, the LMI insurer compensates the lender, but you may be asked to repay that amount directly to the insurer.
If you’re facing repayment difficulties, contact your lender promptly to discuss possible payment arrangements or hardship options.
Does refinancing affect LMI?
LMI policies cannot be transferred between lenders. Refinancing ends your current loan and creates a new one, so if your loan-to-value ratio remains high, you may need to pay for a new LMI policy.
Is LMI refundable?
If you pay off your loan early—usually within the first couple of years—you might be eligible for a partial refund on the LMI premium. Check with your lender for specific refund policies.
What other insurance should new homeowners consider?
Besides LMI, it’s wise to consider home and contents insurance to protect your property and belongings. There are many insurance options available, and tools.
