Lenders Mortgage Insurance (LMI) — Fact Sheet
Source document
This fact sheet is reproduced for general information purposes only.
It is an industry-standard explanatory document and has not been authored by Model Mortgages.
It does not provide personal advice.
Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance is often referred to as LMI.
It is insurance that a lender takes out to protect itself against the risk of not recovering the full loan balance if a borrower is unable to meet loan repayments.
LMI is a one-off fee charged by the lender when you need to borrow more than 80% of the value of the property.
Benefits of LMI
- LMI allows lenders to provide home loans to borrowers who do not have a substantial deposit but who would otherwise meet the lender’s credit requirements.
- LMI covers the outstanding balance of the loan owing to the lender if the sale of the property does not cover the total loan amount.
What is the cost of LMI?
- The LMI premium can either be:
- added to the loan amount (known as capitalising LMI), or
- paid upfront at settlement.
- If you choose to capitalise the LMI, your loan repayments will be based on a higher loan amount that includes the LMI premium.
- The cost of LMI varies and depends on:
- the lender
- how much is borrowed
- the size of the deposit
The lender will be able to provide the applicable LMI cost.
Is LMI refundable?
- LMI may be partially refundable if the loan is terminated early, usually within the first two years.
- Each lender has its own refund arrangements.
What happens if a borrower defaults and the property is sold?
- If a borrower is unable to meet loan repayments and there is no other resolution, the property may need to be sold to cover the outstanding loan balance.
- The LMI insurer will pay the lender in accordance with the LMI policy and may then seek to recover this amount directly from the borrower.
- LMI does not protect you and does not cover your loan repayments if you are unable to make them.
Borrowers may wish to discuss personal insurance options, such as mortgage protection insurance, with a broker to cover unforeseen circumstances.
What happens when the loan is refinanced?
- LMI is lender-specific.
- If you refinance to a different lender and borrow more than 80% of the property value, you will usually need to pay LMI again.
- It is important to consider whether the cost of paying LMI again outweighs the benefit of refinancing to a lower interest rate.
- If the equity in your home has increased, or you have paid down the loan balance, you may be able to borrow less than 80% with the new lender and avoid paying LMI again.
Important
If you experience difficulty meeting your loan repayments, you should contact your lender as soon as possible.
You may be able to arrange a repayment variation under financial hardship provisions.
More information about LMI is available at:
- moneysmart.gov.au
- asic.gov.au
Case study
Bob and Jill have found a home they want to buy for $500,000.
Typically, they would need a 20% deposit ($100,000) to secure a loan.
By taking out Lenders Mortgage Insurance, their lender is prepared to provide a loan of up to 95% of the property value.
This allows Bob and Jill to purchase the home sooner with a 5% deposit ($25,000) and stop paying rent.
The lender passes on the LMI cost to Bob and Jill as a one-off premium.
Lenders Mortgage Insurance protects the lender, not Bob and Jill.
Disclaimer
The information provided in this fact sheet is not legal, taxation, or financial planning advice.
It has been prepared without considering your objectives, financial situation, or needs.
All loan products are subject to lender criteria and approval. Fees, terms, and conditions apply.
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