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Informative Articles

LMI: Explaining the three magic letters

Many borrowers are pre-occupied with avoiding the cost of LMI. What is it and why, you ask? Read on and we’ll go through the basics.

What is LMI?

lenders mortgage insurance
LMI stands for lenders mortgage insurance. That’s right – it’s not just home buyers who have be insured. LMI protects a mortgage lender in the unfortunate, but feasible, case where a borrower can’t meet their repayments and defaults on their home loan.

While it’s true a lender will hold the purchased property as security in case this should ever happen, it may not always be enough to cover the loss – if the value declines, for instance.

How does that affect me?

We’re getting to that! While LMI may be for the lender’s benefit, the one-off cost of purchasing it is passed on to the borrower as part of the home loan. LMI can end up costing thousands of dollars, so it’s not spare change we’re quibbling over here.

When does LMI get charged?

Typically, LMI applies only when borrowers take out home loans that are worth more than 80 per cent of the value of their properties, though different lenders and products might have different ratios. This is because the more of the value of your property that you borrow to pay, the riskier you are as a borrower.

What this means is that home buyers will want to save a deposit worth at least 20 per cent of the property price, in order to save themselves paying a few thousand more.

This sounds like a good deal for the lender.

Hey now, don’t be like that. The existence of LMI actually benefits borrowers as well. It means lenders are more likely to give home loans to a broader range of buyers, for one. And if you can’t save up the full 20 per cent deposit fast enough, but really want to nab that dream property, LMI means you can still get the loan you need.

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