Lenders Mortgage Insurance 101

Buying a new home can be one of the most exciting times in your life. But it also comes with a huge challenge, often taking significant time and asking you to make sacrifices in order to save a deposit that lenders require – typically 20% of the home’s purchase price.

However, if you don’t have a substantial deposit saved, your lender may still be prepared to provide you with a home loan with a deposit of as little as 5% when they take out Lenders Mortgage Insurance¹.

Lenders Mortgage Insurance explained

Lenders Mortgage Insurance (LMI) is an insurance policy that a lender takes out to protect itself against the risk that a borrower defaults on their loan repayments and the lender is unable to recover the full outstanding loan amount. In the simplest terms:

• The LENDER protects itself with Lenders Mortgage Insurance
• The BORROWER can buy a home sooner, with a smaller deposit

Lenders Mortgage Insurance protects the lender

While Mortgage Protection Insurance protects you (the borrower) if you are unable to make repayments on your loan, it’s important to note that Lenders Mortgage Insurance protects your lender – it doesn’t protect you (the borrower) or any guarantor.

How Lenders Mortgage Insurance helps you

LMI allows you (the borrower) to secure a home loan that might not otherwise be available, by reducing the size of deposit you have to provide. This means you can:

• Buy your new home sooner and stop paying rent; or
• Buy a more expensive property with the deposit you already have.

You may also be able to borrow at an interest rate that is comparable to a borrower with a much larger deposit.

A one off cost to the borrower

Lenders Mortgage Insurance will be arranged by your lender, and is a one-off premium that your lender pays to their insurer when you settle on your property. This cost is then passed on to you by your lender, as a one-off fee.

Your lender will be able to tell you how much your LMI premium will cost after you apply for your loan. This will depend on several factors, including the size of your deposit and the type of loan you apply for.

You may be able to add this one-off fee to your loan amount, but that means you’ll be paying interest on it over the term of your loan. The other option is to pay the fee up front, before your lender provides you with your home loan.

Can it be refunded?

Your Lenders Mortgage Insurance fee may be partially refundable if your loan is terminated within the first two years.

If your lender has negotiated a larger up-front discount instead of a right to refund, they may not be able to provide a refund. If this is the case, the full amount of this discount will be passed on to you (the borrower). However, this means that you may be required to pay a LMI fee again if you refinance your home loan with another lender or increase your loan amount.