What is lenders’ mortgage insurance and who does it benefit?
What it is and why it’s charged on some loans.
22 May 2017
There’s a lot of confusion surrounding lenders’ mortgage insurance and who it actually benefits. A common misconception is that it protects borrowers, should they be unable to meet their mortgage repayments. However, there’s actually more to it than this. So to help dispel the myths, we’ve pulled together some of the more frequently asked questions on this topic.
What is lenders’ mortgage insurance?
Lenders’ mortgage insurance, also commonly referred to as LMI, protects lenders in the event that a borrower defaults on a loan and the property sale proceeds are not sufficient to recover the outstanding loan balance and associated costs. By having LMI in place, lenders are then able to make the loan available at lower rates.
Although LMI protects the lender, it is the borrower who bears the cost. LMI is payable on settlement of the loan as a one-off premium. However, many lenders allow borrowers the option of adding the LMI premium to the loan amount in order to help reduce the upfront costs associated with purchasing property. It’s important to understand that by capitalising the premium into the loan amount this way, you will be paying interest on the premium amount for the duration of the loan term.
How much will this cost me?
The cost of LMI will depend on a number of factors including the size of your deposit, the amount you’re looking to borrow and the purpose of the property (whether it’s an investment or not). But as a rule of thumb, the larger your loan size and the lower your deposit, the more you will pay.
Is LMI payable on every loan?
No. Typically LMI is only payable when the deposit is less than 20% of the purchase price but this may vary depending on the lender. If you’re unsure about your finance options and whether you’ll need to pay LMI on your next property purchase, speak to one of our advisers.
Whose responsibility is it to arrange LMI?
Applying for LMI is the responsibility of your lender, so you won’t need to organise this. Your lender will check you meet the insurer’s policy criteria and will handle the LMI application at the time of assessing your loan. More often than not, this process occurs in the background with little involvement required by the borrower.
Where can I find out more information?
To find out more information about your borrowing options or LMI get in contact with one of our Liberty Advisers here or call 13 11 33.