Achieving the dream of home ownership can be one of the most exciting times in your life. At times however, it can seem unattainable due to how long it takes to save a deposit. Lenders’ Mortgage Insurance (LMI) enables us to accept deposits less than 20% for some home loans which would not have otherwise been the case. So what exactly is LMI?
LMI protects us – the lender – not you, the borrower or any guarantor
LMI is insurance we take out to protect us against the risk of not recovering the full loan balance. This happens when you – the borrower – are unable to meet your home loan repayments and default on the loan. If the property is sold and there’s a shortfall between the outstanding loan balance and the proceeds from the sale of the property, the LMI provider will pay the difference to us.
LMI is a one-off cost paid when you complete your property purchase
The LMI premium is a once only cost that we pay as the lender when your property purchase is complete. It insures us against financial loss for the full term of your loan. We will typically pass the cost of the LMI premium on to you in the form of an LMI fee.
The Cost of LMI
The cost of LMI will depend on how much you borrow and how much of the purchase price you pay from your own savings. The more of the purchase price you pay, the lower the cost of LMI will be. Additional discounts or loading may apply. Subject to eligibility, it’ll be your choice to pay the LMI fee from your own savings or to add (capitalise) this amount onto your loan. We’ll be able to provide details of what options are available to you at application stage. At a future point, if you refinance your home loan with another lender, an LMI fee might be payable again.
LMI might be partially refundable
LMI is generally not refundable. However, in some circumstances you may be entitled to a partial refund of the LMI fee, depending on the arrangement between us and our LMI provider.
LMI is not the same as Mortgage Protection Insurance
LMI is different to Mortgage Protection Insurance (MPI). MPI may cover some of your mortgage repayments or pay a lump sum should certain specified events occur such as unemployment, sickness, disability or death.
Contact us as soon as you think you might have problems meeting your loan repayments
If you’re experiencing financial hardship, put your hand up, let us know and we’ll see how we can help. The best thing you can do is let us know as soon as you’re aware repayments will become an issue and we’ll work with you to try and make life a little easier.
You’re still responsible if the proceeds from the sale of your property are not sufficient to repay the loan in full
If you default and your property needs to be sold, sometimes the money received from the sale of your home will not be sufficient to repay the outstanding loan. In this situation the LMI provider will pay us an amount in accordance with the LMI policy (normally the difference between the outstanding loan balance and proceeds from the sale of the property). Once an LMI claim has been paid, the outstanding debt owed by you is typically passed from us to the LMI provider. The LMI provider may then seek to recover the remaining debt from you and any guarantors.
For example: Mike and Jess borrowed $600k to buy a home valued at $650k. As their deposit was less than traditionally required, LMI was taken out and the fee was added to (capitalised into) the Loan (included in the $600k borrowed). Due to unforeseen circumstances, Mike and Jess aren’t able to meet their loan repayments, resulting in them defaulting on the loan and accumulating $15k in unpaid interest. The end result being that the property is sold.
Let’s say, in this scenario the property sells for $550k and the outstanding loan balance is $625k (which includes the amount borrowed, unpaid interest and other fees associated with selling the property) leaving a shortfall of $75k. The LMI provider pays us, the shortfall. They then have the right to seek repayment of the $75k from Mike and Jess.