LMI (Lenders Mortgage Insurance) FAQs
When it comes to buying a property, the finance world is full of new words and acronyms, all of which can seem a bit confusing and overwhelming. LMI, LVR, offset, redraw, splits, portability, switching.. the list goes on. Understanding what these mean, and how they can affect you is an important step in finding the loan which is going to suit your specific needs best.
What is LMI?
LMI, or Lenders Mortgage Insurance is exactly what it says on the tin, its the banks insurance policy against a borrowers mortgage with them. In the event that a borrower defaults on their mortgage repayments and the bank incurs a loss after the property is sold, LMI protects the bank against this loss. Banks receive their LMI policy from external insurance providers, and they pass this cost onto the borrower.
Does every mortgage require LMI?
No, LMI is generally only required for mortgages where the LVR (the loan to value ratio) exceeds 80%. The LVR is calculated by expressing the loan amount in comparison to the value of the property. For example, a property worth $100,000, with a loan amount of $90,000 has an LVR of 90%, which will therefore incur LMI.
How much is LMI?
LMI is a once- off fee that is either added to your loan amount, or paid up front by the borrower. The amount will vary depending on a number of factors, but primarily its determined by the LVR, and the total amount of the loan. Higher LVRs & loan amounts will incur higher LMI premiums. Other factors which may play a role are the type of property it is (apartment, house etc), the location of that property, the credit rating of the borrowers, and whether or not the borrowers are Australian citizens. We can provide you with an estimate for LMI, should you think this may affect you.
Isnt this just the same thing as Mortgage Protection Insurance?
No, Mortgage Protection Insurance will assist you with making mortgage repayments during events such as unemployment or disability. LMI protects the bank in the event that a borrower defaults on their repayments & the property is subsequently sold for less than the outstanding loan amount.
How do I benefit from LMI?
LMI effectively decreases the banks risk for lending to customers who don’t already have a 20% deposit. This allows people to purchase homes & get on the property ladder sooner.
Is LMI refundable after my LVR drops below 80%?
No, the LMI fee is not refundable if the loan balance drops below 80% after settlement, or if the borrower refinances their loan with another bank. Each time a property is refinanced (ie when you switch banks) if the LVR remains at 80% or above, the new bank will charge the borrower LMI, regardless of whether the previous bank also charged the borrower LMI.
