Q. Is it true that if you refinance or you pay out your mortgage within the three years, you’re entitled to a refunded portion of the mortgage insurance paid? If this is so, who refunds it, the bank or the insurer, and when do you get the refund?
A. Most LMIs (lenders mortgage insurance) refund mortgage insurance to borrowers, either directly or indirectly through the lender if the LMI policy is cancelled in the first 12 months of the loan. A refund is available if the principal and accrued interest is repaid in full and the borrower hasn’t defaulted on any mortgage repayments. Refunds generally aren’t paid after 12 months of the home loan has expired.
The amount of the refund varies between LMIs from 40% to 50% of the original premium. While the refund sounds like only a small amount, stamp duty on a mortgage insurance contract isn’t refunded. In addition, as the risk of default is greatest during the early years of the mortgage, including the first year, some of the insurance cover has already been spent.
Borrowers should clarify their lender’s policy on refunding mortgage insurance. The refund is automatic and is initiated by the lender as part of the loan settlement process. Once the property is sold or the loan repaid, mortgage insurance is refunded to the lender or direct to the borrower within 30 days of the loan being paid out.