Lender Mortgage Insurance (LMI)
LMI is an insurance fee which protects the lender in the event you are default on your home loan. The lenders will charge the LMI when you borrow over 80 per cent of the value of your property. To the banks, it is higher risk when you borrow at higher percentage.When do I have to pay LMI
- If you are working full time or you can show your income evidence, you will only need to pay LMI when you borrow more than 80 per cent of the value of your home (80 per cent LVR)
- If you are self employed and you are borrowing under low-doc loan, you will need to pay LMI when your loan is above 60 per cent LVR.
- This type of insurance is arranged by the lenders.
- LMI is different to the other type of insurance in Australia. It is a once off fee, not an ongoing fee. Unless you request for LMI to be capitalized, otherwise it will be deducted from your loan amount when the loan is funded, which is known as settlement day. For example, your loan amount is $400,000, and the LMI charged is $5,000, the fund available for settlement would be $395,000.
- Not all lenders have the same Mortgage Insurance Company. Therefore, instead of shopping around for lower interest rate, some people shop around for lower LMI premium. We can help you to find the lender who offers lower LMI.
- Some people would prefer to save more deposit to avoid LMI. However, it is not always a good choice. Especially, it is not easy to afford paying rent and save big deposits at the same time. Using your parents’ home as an additional security is also one of the options which can help to avoid LMI and paying lower to none deposit.
- Different LMI providers have different rates to calculate LMI. Based on the loan size and the LVR that you are borrowing, the lenders or the LMI providers will work out how much LMI should be charged.
- You cannot choose the LMI providers because each lender has agreements with 1 or 2 LMI providers so they cannot change the mortgage insurer. Instead of choosing the mortgage insurer, you can choose the lenders to lower the cost of LMI.
- To the lenders, people borrow more than 80 per cent loan have higher default risk in comparison to the people who borrow under 80 per cent. The LMI providers involve taking over the risk.
- LMI only protects the lender, not the borrowers. In the event of default and the lenders cannot recover the loan, they will make a claim with the mortgage insurer.
- LMI only covers the unpaid balance at the event of default. It does not cover any damage to your property or any unexpected events such as death or permanent disability.
- In order to issue formal approval, the lender would also need to get approval from the mortgage insurer. This would be an internal process between the lender and the LMI provider.
- Due to the higher risk associated with the loan, most LMI provider requires the borrowers to have a stable employment, good savings history and perfect credit history. In most cases, the LMI provider declined the loan due to the borrowers fail the credit scoring.
- However, some lenders have Delegated Underwriting Authority with the LMI provider which means your application does not need to have a second approval.