Home Building Blog LMI? Please explain?!

LMI? Please explain?!

Ready to start applying for finance but the jargon has your head spinning? One of the big things for you to be aware of is Lenders Mortgage Insurance, more commonly known as LMI.

So, what is LMI?

Whilst you’ve been researching, you might have seen the term ‘LMI’ crop up on bank websites, home load info sheets and builder websites. Simply put, LMI is insurance that protects your lender in the event that you default on your home loan.  It covers the lender in case your house is sold due to defaulting on the loan and the resale value doesn’t cover the loan amount. The lender is then able to make an insurance claim that covers the difference.

When is it applied?

Firstly, LMI isn’t applied to every loan. LMI is included on loans to the value of more/equal to 80% of the property value. Or more simply put, it applies when a 20% deposit isn’t saved.

Why is it important?

We know that saving a 20% deposit isn’t always possible.  Basically, LMI can be an alternative to saving 20% deposit or asking your parents to be a guarantor on your loan. The easiest way of thinking about LMI is that you’re paying a premium to the lender (like you would for any other insurance) in exchange for them providing you a loan with a smaller deposit. Some lenders will provide home loans with just 5 per cent deposit if LMI is paid.

FAQs

  • People often get these two confused, but they cover two different things. LMI protects the lender if you default on a payment compared to Mortgage Protection Insurance which protects you in the event of loss of employment etc.
  • The cost of LMI depends on a few factors including:
    • Amount of your home loan
    • Size of your deposit
    • The type of loan
    • Value of the property
  • Here is a handy table that provides a rough estimate of the amount of LMI that could be charged based on your property value and loan amount.

Finance services provided by Resolve Finance, Australian Credit License 385487.

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