LMI is an insurance policy that protects the bank/lender where you have your home loan. Should you default on your mortgage the bank will repossess your home and sell it as quickly as possible, usually at a discounted price. These funds are used to repay your debit however if there is a shortfall the LMI will cover the bank/lender.
For example, if you purchase a property for $650 000.00 and take out a 90% loan you will be charged LMI on this loan, making the total loan amount approximately $597 000.00. Hypothetically two years on you still owe $590 000.00, the property has gone down in price and you have defaulted on your loan. In this case the property will be sold as quickly as possible for as much as the bank can get, perhaps $500 000.00 meaning the bank is set to lose $90 000.00. This is where the LMI policy you paid for will repay the remaining debit so the bank/lender has no loss.
This is all hypothetical of course however that is what most insurance policies are based around, a cover just in case the worst happens even though we all hope it never does.
Depending on how much deposit you have managed to save you may need to pay LMI on your loan. If you have saved up a 20% deposit plus stamp duty, or you have a property with available security to the same value then you won’t need any LMI as you are borrowing 80% or less of the value of the property.
Anything over 80% will incur an LMI charge and unfortunately the cost depends on the amount you are borrowing and the value of the property. There are calculators available or you can contact your Lender for an estimate.
Rest assure, LMI seems like a bad thing but without it so many people would be unable to get into the property market and whilst it is an added expense, the fee is charged to your loan after funding so it’s not more cash you need to come up with.
LMI is a great help to anyone who hasn’t saved the 20% deposit to get into their home however there is another option worth considering and that is using a security guarantor. This is when a guarantor can use cash or property as security to avoid paying any LMI.