Q. My partner and I are researching home loans, but we keep seeing the term LMI popping up and we would like to know what it means and how it will affect what home loan we choose?
A. Lenders mortgage insurance (LMI) is a one off payment and has a purpose of protecting the lender in the event that you default on your mortgage. It does not provide any protection for you, the borrower. Lenders usually take out this insurance when they are lending more than 80% of the value of the property and it enables them to take on this higher risk. The premium is usually passed onto you and added to the loan amount, and can add to thousands of dollars. The higher the percentage of the loan compared to the value of the property the more you will have to pay for LMI.
Unlike some extra costs, it is possible to avoid paying lenders mortgage insurance. Firstly, you will need to save a deposit or have equity which equals 20% or more of the purchase price plus extra funds for costs like stamp duty and solicitors fees. Some lenders may have different requirements when it comes to LMI, so you will need to check with your lender about how much you will need.
Secondly, you can have someone be a security guarantor for your home loan. By offering their property as additional security the lender then has sufficient equity to lend at 80%, even though you don’t own this property.