Mortgage insurance for lenders, or LMI, is insurance that protects the lender, not you. It is usually a one-time payment made by the borrower at the time the loan is liquidated. The lender will pay the LMI premium to the insurer when liquidating the purchase of your home. This one-time upfront payment covers the lender for the life of the loan (which can be up to 30 years).
The amount of the LMI premium depends on the lender, how much it lends to you and the amount of your deposit. The lender will normally transfer the cost of this LMI premium to you in the form of a commission. This is because the cost of buying an LMI is part of the lender's costs in providing financing for loans. You can pay this cost to the lender at the time of the agreement, or you can include it as part of the loan (so the cost of the LMI will be added to the loan repayments during the term of the loan).
Your lender, broker, or financial advisor will be able to provide you with details of the options available to you. It's important to note that the lender's mortgage insurance doesn't protect you as a borrower, it only protects the lender. However, Mortgage Choice states that this will be evaluated on an individual basis and that you may also have to be a member of specific professional associations. Make sure you don't confuse LMI with mortgage protection insurance; this is a completely different insurance product.
If you want to avoid paying the LMI but don't have enough deposit saved, it might be better if you don't enter the housing market yet and wait until you have saved the 20% deposit that is generally required to avoid paying the LMI. Many people believe that the LMI is designed to protect the borrower if the loan is not repaid, but in reality it is mortgage protection insurance, which is a different product. Under the plan, eligible homebuyers who choose to participate can apply for a loan with a deposit of as little as 5% and will not have to pay the LMI if the lender approves the loan. LMI insurers recognize that it can be difficult for you to pay off your debt if you have financial difficulties.
Some financial institutions and insurance companies can differentiate between an investment and the purchase of a residential property when it comes to the cost of the LMI. The FHLDS and the New Home Guarantee allow first-time homebuyers to qualify to buy a property with a deposit of only 5%, plus the costs of the loan, without needing to purchase mortgage insurance (LMI) from the lender. Based on these examples of calculations, an investor could end up paying about 215% more for the LMI than a first-time homebuyer between owners and occupants. LMI is not mortgage protection insurance, which a borrower can take out separately to insure against the risk of not being able to meet their loan payments.
Many first-time homebuyers debate whether it's better to pay the LMI or to postpone the home search until they have saved up a larger deposit. If you didn't pay your mortgage loan and your house sold for less than the outstanding balance of the loan and your lender filed an LMI request, you still owe the amount of the deficit, but you'll have to repay that money to the insurer (instead of the lender). Lender's Mortgage Insurance (LMI) is an insurance policy that protects the lender from financial losses if you can't meet your mortgage loan payments. However, it's important to remember that the LMI doesn't provide you with any protection even if you pay it; it's there to protect your lender.
