Anyone who had to repay money to a Lenders Mortgage Insurance provider, will tell you how bad the experience was. That is why it is important to understand what this insurance is, what it covers, how it works, and who pays for it.
In this article, you will find an explanation of those important points that will help you to feel confident when applying for a home loan.
Lenders Mortgage Insurance is the insurance that a lender takes in order to cover itself for a loan payment default. It is applicable in cases of home loans where the initial deposit is less than 20% of the value of the property. In these cases, it is paid by the borrower. The lender pays it, in instances where it decides to insure itself, and the initial deposit is higher than 20%. In Australia, around 20 percent of home loans are LMI insured. The two main LMI providers are Genworth Financial and QBE LMI.
LMI can be expensive and add an important amount to your initial payment. It is important that you calculate it beforehand. Genworth offers a nice LMI calculator based on the estimated property value, the initial deposit and the terms of the loan. Other important factors influencing LMI are the borrower’s employment situation, and the buying purpose. Not all lenders ask for this insurance. Once you have decided on a loan, check if your bank asks for LMI and perform a proper calculation of your LMI considering all involved factors.
LMI is a risk cover for the lender, for cases when the borrower has insufficient funds to pay for a substantial initial deposit, which implies a higher risk to the lender in cases of default by the borrower. By reducing this risk, it allows the lender to provide larger loans, at lower interest rates.
The way it works is simple. If for whatever reason, you cannot repay your loan, the lender will sell the property to recover as much as possible. If the value of the property doesn’t cover the full owed amount, the LMI insurer will cover the difference, and require that you repay the amount directly to them.
The table below shows approximate values for a first time buyer, and a loan term of up to 30 years.
Source: Genworth LMI calculator
Where to find more information
There are many source with good information about LMI. The following offer in depth information:
1. Lendi: this financial comparison site offers a detailed explanation of LMI.
2. Understanding Australian Consumer Credit Law. This book by Gail Pearson and Richard Batten has a more technical section on LMI.
3. National Consumer Credit Protection Act 2009. If you are legally oriented, you may find interesting reading the Consumer Credit Protection Act by yourself.