Lenders Mortgage Insurance (LMI) is a type of insurance cover. This insurance provides lenders and investors with cover against mortgage loan default. LMI is charged to borrowers whose deposit of the property purchase price falls below a designated amount. This insurance cover is essential to mitigate the risk of mortgage loans to borrowers with small deposits. Therefore LMI constitutes an extra cost in addition to the fees and charges associated with purchasing a property. Here’s our guide to understanding lenders mortgage insurance.
An investor will arrange for the LMI premium sufficient to cover the risk of the mortgage loan. However, the borrower will be responsible for making payments towards the insurance premium. The calculation for LMI is on a percentage of the purchase price. As the borrower, you need to critically ascertain your ability to meet this cost. In addition you need to make sure you are not only comfortable but are also capable of paying these rates. Moreover, it can be quite expensive to acquire cover for high risk loans.
Can I include LMI in the loan amount?
The answer is in the affirmative. For most lenders the total loan figure can be inclusive of the LMI fee. However, including the LMI in the overall home loan will increase the total amount borrowed. Thus the requirement is that the borrower pays interest on the total loan amount. Subsequently the minimum monthly loan repayments will also be higher.
What are the risks?
Lenders Mortgage Insurance only provides cover for lenders and not for borrowers. As such LMI covers the lender for any shortfall in the event of a loan default. There is a general misconception that LMI is intended to cover the borrower if they are unable to meet their mortgage repayment obligations. Unfortunately that is not the case. LMI does not provide any cover for borrowers in case of default. In case of a default the insurance provider will pay out the bank then pursue you for the balance. Often LMI is confused with Mortgage Protection Insurance. This is an entirely different type of insurance cover and does offer cover for the borrower.
Another important consideration with adding LMI to your home home is that you will incur interest on the premium. This will not only increase the total amount you owe but also increase your mortgage repayments.
Lastly, as with any other long-term commitment it is important to do your due diligence. It is also critical to factor in potential future interest rate increases. Ensure you acquire the correct professional, legal and financial advice to assist you make an informed decision. This is important to do before you sign up to any loan.