Lenders Mortgage Insurance (LMI) is a term you may come across when applying for a home loan in Australia. It is a type of insurance that lenders may require you to take out when you are borrowing more than 80% of the property’s value. This article will explain what LMI is, how it works, and why it’s essential to understand when you’re considering a home loan.
What is LMI?
LMI is a type of insurance that protects the lender in case you default on your mortgage repayments and the property has to be sold to recover the debt. It is designed to protect the lender, not the borrower, and can help to reduce the risk of the lender in the event of a default.
How does LMI work?
If you are borrowing more than 80% of the property’s value, the lender may require you to take out LMI. The cost of the insurance is usually added to the loan amount, which means you will have to pay interest on the insurance premium. The amount of LMI you will have to pay depends on the amount you are borrowing and the value of the property.
For example, if you are borrowing $500,000 to purchase a property worth $600,000, you would need to borrow 83.3% of the property’s value. In this case, the lender may require you to take out LMI, and the cost of the insurance premium could be around $11,500. This amount would be added to your loan, and you would have to pay interest on it over the life of your loan.
Why is LMI important?
LMI is an essential factor to consider when applying for a home loan because it can significantly affect the cost of your loan. The higher the LMI premium, the more you will have to pay in interest over the life of your loan. Therefore, it’s important to understand the impact of LMI on your loan repayments and budget accordingly.
It’s also important to note that LMI does not protect the borrower. If you default on your mortgage repayments and the property has to be sold, the insurance will only cover the lender’s losses. If the property is sold for less than the outstanding loan amount, you may still be liable for the shortfall.
Lenders Mortgage Insurance is an insurance product that lenders may require you to take out when you are borrowing more than 80% of the property’s value. It can significantly affect the cost of your loan and is an important factor to consider when applying for a home loan in Australia. Be sure to understand the impact of LMI on your loan repayments and budget accordingly.