As a mortgage broker I see a lot of clients who are wanting to get into the property market, but they don’t have a huge deposit. They may have been renting for a while, or are first home buyers who have been saving but keep seeing property prices rising, so rather than waiting longer to build their savings they want to buy now. The way lenders are able to assist borrowers in these cases is by taking out Lender’s Mortgage Insurance (LMI).
What is LMI?
Lenders Mortgage Insurance (LMI) is insurance that a lender takes out to insure itself against the risk of not recovering the outstanding loan balance if you, the borrower, are unable to meet your loan payments and the property is sold for less than the outstanding loan balance.
In layman’s terms, if a borrower cannot meet their loan repayments and no other resolution is found, the security property may need to be sold to cover the outstanding loan amount. In this situation, sometimes the house is sold for less than the amount of the loan balance, leaving an amount still owing. If this happens, you as the borrower are obliged to repay that outstanding amount of the loan. The LMI insurer will cover the loss for the lender in accordance with the LMI policy. Where there is a shortfall, the LMI insurer may then ask you, the borrower, to repay this directly to them, rather than to the lender.
When would LMI be required?
Where you don’t have a large deposit (usually 20% of the property price) but have managed to save at least 5%, a lender will apply to a Lender’s Mortgage Insurance provider to cover your loan. LMI reduces the risk of loss to the lender if you have difficulty meeting your loan repayments, making it more likely that they will lend the money to you to buy a property even though you don’t have a 20% deposit.
LMI therefore allows home buyers to get into the property market a lot earlier than would be possible if everyone had to save at least a 20% deposit.
Who Pays for LMI?
The cost of LMI is variable, as premiums are calculated based on the overall risk in the proposed loan. A borrower who has a 5% deposit and needs to borrow 95% of the property purchase price, will pay a higher premium than someone who has a 10% deposit to contribute, as there is a higher risk to the insurer when a borrower needs to borrow a higher percentage of a property value.
As the LMI premium is a cost of providing finance, the lender passes the cost of the LMI premium on to the borrower. They can pay the premium at settlement of the loan through their savings, or by adding the cost of LMI to their loan which will result in a higher loan and repayment amount.
How do I avoid needing LMI?
There are a couple of ways to avoid having to pay for LMI on your loan.
- Save at least a 20% deposit.
- For first home buyers, access some of the Government assistance schemes such as the First Home Loan Deposit Scheme, the New Home Guarantee or Single Parents Guarantee Scheme.
There are other avenues that some lenders also have available, such as Family Guarantees where parents can assist their children get into the property market by providing their home as further security. Some lenders also have specific policies relating to applicants who are professionals in certain industries where they may waive the LMI requirement, even when they only have a 10% deposit.
Common Misconceptions with LMI
When speaking with borrowers who have taken a loan and paid for LMI there is some lack of understanding as to who LMI protects. They are often surprised to learn that LMI protects the lender and it in no way provides any protection to the borrower. Only the lender can make a claim under a LMI policy.
Lenders Mortgage Insurance is also not the same as Mortgage Protection Insurance, which is another type of insurance cover that can protect a borrower from defaulting on their loan should they lose their income.
LMI is a tool to help buyers get into the property market earlier than they otherwise could, as saving a 20% deposit is very difficult with the increase in costs of living combined with rises in the property market. At SHL Finance we have helped a lot of our clients improve their situation by working with them to achieve their financial goals, and we would love the opportunity to help anyone wanting to buy but are unsure whether they can. Please call Reece on 0478 021 757 should you want to find out how we can help you.
2/23 Ringwood Street Ringwood Vic 3134