Lenders Mortgage Insurance Explained

If you are borrowing more than 80 per cent of the property value, your lender will usually require you to pay for Lender’s Mortgage Insurance (LMI). Taking this type of insurance will protect the lender in case you default on the loan and the eventual sale of the property is not enough to cover the whole loan value.

Because it reduces risks, lenders usually allow you to lend more, which becomes an incentive to the borrower. In general, many home buyers agree to pay LMI than wait for several years of saving for a deposit. Your lender will usually arrange the LMI and can be added to your total loan amount to reduce the upfront costs.

There are ways to avoid paying LMI if you think that the cost is high. You can pay for a larger deposit or assign a guarantor if you cannot pay for the 20% deposit of the property you wish to buy.

How Will LMI Affect Your Home Loan?

If you have to pay for LMI, it’s important to know the effect it can have on your mortgage loan process. First, you have to re-evaluate the target loan amount or your budget

You may need to re-think your budget for home purchase as LMI may account for a substantial part of your mortgage loan. Your home loan broker will help you determine the costs associated with the mortgage loan so that you can work out how much money you need to spend on purchasing the property.

Secondly, be prepared for the mortgage loan approval to take a little longer.

Before you can qualify for LMI, you first need to pass the qualification guidelines of the assigned insurance company as well as the mortgage application criteria of the lender. Because it is actually the mortgage insurance company that is taking the risk, they usually have additional requirements and checks before granting the approval. Hence, a loan with LMI may slightly delay the home loan approval process.