What is Lenders Mortgage Insurance? (LMI)

Mortgage Insurance sounds like it is a product to help you, but it is designed to protect the bank for taking a higher risk in lending to someone with a smaller deposit. Let's break it down.

What is Lenders Mortgage Insurance? (LMI)

Lenders Mortgage Insurance is something that you’ll need to pay if your deposit is less than 20% in most cases.

You might be wondering, what is LMI for?

At first thought people commonly believe LMI is an insurance to protect themselves, it is an insurance after all. But that’s not right. LMI is actually there to protect your lender!

In short:

  • If you buy a new home and the bank give you 90% of the property value
  • Then you default on your loan
  • And costs and interest accrue and you are not making your repayments
  • then they cannot sell the property for what it was worth when you purchased it
  • They are going to make a loss
  • To protect themselves from this event, they take out a policy to protect themselves, and you pay the premium
  • This is at your expense to be given the right to buy a home with a smaller deposit.

LMI is basically added to your loan, you don't have to come up with a further sum of cash to pay for your premium. We can work out your premium for you  

You will then pay interest on the money you borrowed to pay the premium. But this is also pretty normal and your growth in your new home should well and truly outweigh the cost to benefit ratio.

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