By Garth Brown October 5, 2017

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Lenders Mortgage Insurance

Property Investment
Lenders Mortgage Insurance

What is lenders Mortgage Insurance?

LMI is an insurance policy which compensates lenders or investors for losses due to the default of a mortgage loan.

As required by Australian Banks, Borrowers’ who have less than 20% deposit of the property purchase price are charged LMI by finance lenders this is an extra cost over and above the standard fees and charges related to purchasing.

The LMI premium is arranged by the lender, not the borrower, but is payable by the borrower and is calculated on a percentage of the purchase price.

As the purchaser, you need to make sure you're happy to pay it because these rates can be expensive to cover for riskier loans.

CAN LMI BE INCLUDED IN THE LOAN AMOUNT?

Yes, for most Lenders the LMI fee can be included in the loan amount, however you need to be aware that If LMI is added into the home loan it will make it higher and the borrower will pay interest on the total loan and will also increase the minimum monthly loan repayments.

ARE THERE RISKS?

It is important to note: Mortgage Insurance protects Lenders NOT Borrowers in the event of ‘default on mortgage’.

You need to be aware that in case of a loan default LMI covers the Lender for any shortfall.

Many borrowers mistakenly believe that LMI is designed to protect the borrower if the borrower is unable to meet their mortgage repayments and the property has to be sold for less than the loan.

LMI does not cover the borrower for any shortfall after paying out the Bank and the Insurance provider will pursue you for the balance.

Some borrowers have declared Bankruptcy after being pursued by Insurance Providers.

GARTH BROWN'S COMMENTS

Often LMI is confused with Mortgage Protection Insurance, which is a different product entirely and does cover the Borrower.

Be careful including LMI in your home loan as you will incur interest on the premium and this will not only increase the total amount you owe but also increase your mortgage repayments.

It is very important to do your due diligence, factor in potential future interest rate increases, and get the correct professional legal and financial advice before you sign up to any loan.

About Garth Brown Garth Brown is the Founder and Director of Brown and Brown Conveyancers one of Sydney’s leading Conveyancing Firms. With 20 years experience as a practicing Conveyancer he has assisted hundreds of Clients to navigate through the maze of conveyancing issues when buying and selling property. Visit www.conveyancers.net.au/

1 comment

Steve Polder 2017-10-06 09:36:58

Hi guys, why don't we call out LMI for what it really IS - an insipid tax that adds further to the "accessibility" problem that we have in the property market (particularly in Sydney). Forget calling it insurance and you're right that most new home b ...Read full version

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Steve Polder October 6, 2017

Hi guys, why don’t we call out LMI for what it really IS – an insipid tax that adds further to the “accessibility” problem that we have in the property market (particularly in Sydney). Forget calling it insurance and you’re right that most new home buyers think it’s a protection for themselves BUT it’s only covering the banks against loss – so why don’t THEY pay it??? Don’t give me this rhetoric that it allows more people to borrow money with less of a deposit – it only serves to further disadvantage those trying to get into the property market. Young people save money for years, walk into a bank and are then told they have a funding shortfall because they have to use the majority of their savings to pay this ludicrous TAX which often adds up to be more than the stamp duty on the purchase! I’ve been working in this sector for the past 25 years and this is probably the most unfair aspect of the property financing process. Yes you can capitalise the LMI into the loan but that doesn’t diminish the fact that the banking sector is “gouging” consumers and no supportive platitudes will suffice. And don’t get me started on the current regime of penalisation on the investors of this world! Anyway Michael, thanks for all your valuable information and I continue to watch this space – cheers.

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