What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance was first introduced into Australia by the Australian Government back in 1965 as a way to assist buyers to obtain their home without saving up the traditional 20% deposit.
What LMI does is allows the banks to offer the same loan, at the same rates and fees to those with a lesser deposit, but with the payment of the LMI premium.
If you turned up to the bank and asked for $300,000 they wouldn’t give it to you unless you were putting something up as security. The security you can offer them is your home or investment property – the idea being that if you don’t pay back the $300,000 then the bank is entitled to take possession of your property, sell it and recover their money.
It is for this reason that banks want a 20% deposit. If they ever do have to take possession and sell there is a 20% buffer should there be a fall in the market. The 20% buffer basically protects the bank and provides them with some confidence they will be able to recover the loan funds, even in a downturn.
If you do not have a 20% deposit then the lenders want the mortgage to be insured by a Lenders Mortgage Insurer which basically transfers the risk of loss from the bank to the insurer. Essentially what the bank does is gives a copy of your mortgage application to the Lenders Mortgage Insurer who decide whether they will insure the loan or not. It is this second approval that is required that makes borrowing over 80% difficult, even if you are living in Australia.
So to buy property in Australia without a guarantor you either need a 20% deposit or will pay some form of mortgage insurance premium. Either way, the banks risk of losing is very low.
Benefit to borrowers:
The advantage to borrowers is being able to enter the property market sooner and start building equity earlier than if they had to continue paying rent while saving the deposit.
It is important to note that the Lenders Mortgage Insurer protects the bank from loss, not the borrower, and should not be confused with Mortgage Protection Insurance which covers the borrower if they are sick, become disabled or die.
How is the fee calculated?
The LMI fee charged will vary from one bank to another and depends on a number of factors. The amount of the fee will depend on the size of your deposit, the value of the property and banks arrangement with the LMI. The bigger the deposit you have the cheaper the insurance will be and the smaller the loan amount the cheaper the insurance will be.
Can Mortgage Insurance be capitalized?
Yes, most lenders allow for the LMI to be capitalized on top of the loan (ie, so you don’t pay for it out of your own pocket upfront). You do not have to have it capitalized of course but will just need to put in some additional funds of your own.