Lender’s Mortgage Insurance (LMI) is an insurance policy obtained by the lender, but paid for by the borrower. It is for the protection of the lender, and not the borrower. This is the most important aspect of LMI to understand. The borrower must make their own insurance arrangements to cover the debt if they wish to do so.

LMI enables buyers who have not saved a 20% deposit an opportunity to get into the market. While it may feel like a waste of money the other view is that is can remove the risk of the target property increasing in value faster than you can save.

The LMI policy protects the lender against any losses where:
• the borrower default on their loan;
• the lender sells the security property; and
• There are not adequate funds to cover the outstanding loan and any fees and charges that may have accrued.

The LMI premium is based upon a sliding scale depending upon the loan to value ratio (“LVR”) - the higher the LVR, the higher the premium.

LMI will normally not cover penalty interest, early repayment penalties, LMI premium, physical damage to property and fees and charges not directly related to costs incurred by the lender in order to recover the debt.

LMI is available for both owner occupied & investment loans. In addition to the borrower needing to satisfy a lender’s criteria, they must usually also meet the requirements of the mortgage insurer. In many cases an application may meet the lending guidelines of the lender, but fail to meet the mortgage insurer’s guidelines, in which case the lender will decline the loan.

Different lenders have different criteria and premiums in relation to LMI so let me guide you through your options if you are considering buying with less than a 20% deposit. once such option is to use a guarantor. This is something that we will explore soon.