Why do I need to pay LMI?
As a general rule, borrowers will need to pay LMI if they are borrowing more than 80% of the property value. However, if a borrower is self-employed and applying for a low doc loan because they cannot prove their income, LMI will apply when borrowing more than 60% of the property value. The LMI premium is arranged by the lender or bank during the loan approval process, so borrowers need not worry about any additional paperwork.
When do I pay LMI?
The LMI premium is deducted from the loan funds when they are advanced. For example, if a borrower borrows $500,000 and the LMI premium is $5,000, then when the loan is advanced, they will receive $495,000. The only exception to this is if the borrower is able to “capitalise” or add the cost of the LMI premium on top of their mortgage. While this doesn’t avoid LMI altogether, it does avoid having to pay it upfront.
How do banks calculate the LMI Premium?
LMI providers calculate the premium using a LMI rate chart or premium table. They generally charge a percentage of the loan amount and a percentage of the property value that the borrower is borrowing (the LVR). Different LMI providers have different premium rates, which can result in thousands of dollars in difference between the cheapest and most expensive LMI providers. While borrowers cannot choose which mortgage insurer their bank uses, they can choose their lender, thereby choosing which mortgage insurer their mortgage is insured through. This way, borrowers can reduce the cost of their LMI premium.
Who is protected by LMI?
It is important to note that LMI only protects the lender, not the borrower. If you are unable to repay the loan and the lender does not recover all of their money, they can make a claim with the insurer. Damage to the property that is being used as security for the mortgage is not covered by LMI and should be covered by your building insurance policy.
Does the insurer need to approve my loan?
The mortgage insurer will also need to approve your loan application, and they are conservative due to the high risk associated with loans where there is little or no deposit. As a result, they require borrowers to have a stable employment history, a perfect credit history and, in most cases, a savings record. Mortgage insurers are also known for credit scoring applications, which can result in declined applications.
In conclusion, LMI has been a valuable tool for first home buyers and those with a smaller deposit to enter the property market. However, it is important to understand that LMI only protects the lender, and borrowers should consider their insurance needs to ensure they can manage their loan in the event of major life events.