Lenders Mortgage Insurance

If you’re finding it difficult to save a 20% home loan deposit, you might still be able to borrow by paying Lenders Mortgage Insurance. We’ll run through how LMI works and what it might mean for you.

Lenders mortgage insurance

How Lenders Mortgage Insurance (LMI) works

Lender’s Mortgage Insurance (LMI) is insurance that a lender takes out to insure itself against the risk of not recovering the outstanding loan balance. This is required if you, the borrower, are unable to meet your loan payments and the property is sold for less than the outstanding loan amount (known as the ‘shortfall debt’).

The Lender will normally require LMI if you do not have the required home loan deposit (typically 20% of the property value) and the cost is usually passed to the borrower as a fee. 

Paying LMI may mean that you are able to apply for a home loan sooner. However, a smaller deposit may also increase the possibility of a shortfall debt as there is less of a buffer between the outstanding loan amount and the property value.

It’s important to note that LMI is insurance that protects the Lender, not you (or any guarantors) against loss. Only the Lender can make a claim under the LMI policy, not you.

Benefits of Lenders Mortgage Insurance

Where you meet all other lending criteria, LMI is one way of buying your home sooner without having the 20% deposit typically required by lenders. Without LMI, a lender may not be able to offer you a home loan even where those other lending requirements are met.

What does Lenders Mortgage Insurance (LMI) cost?

The cost of LMI depends on various factors including, the amount of your home loan, the value of the property you’re buying and the type of loan you get. Your banker or your broker will provide you with the amount of the LMI fee when you apply for your home loan.

How does LMI get paid?

LMI is charged as a one-off cost by the LMI provider to the Lender. We pass on this cost as an LMI fee to you and no more. The LMI fee is generally added to the amount you borrow and payable at drawdown. In some cases, you may be able to pay this upfront using your own funds – speak to us on 03 9553 0271 to find out more. 

Is Lenders Mortgage Insurance refundable or transferable to another financial institution?

LMI is not transferable to other financial institutions. If you repay your home loan within two years of the settlement or drawdown date, you may be entitled to a partial refund of the LMI fee.

If your settlement or drawdown date was on or after 25th November 2019, you’ll be refunded:

  • 40% of your LMI fee if you repay your home loan within 12 months of the date of settlement or drawdown.

  • 20% of your LMI fee if you repay your home loan between 12 and 24 months after the date of settlement or drawdown.

You won’t be refunded any of your LMI fee if your drawdown or settlement date was before 25th of November 2019; or if you don’t repay your home loan within two years of your settlement or drawdown date. If you wish to refinance to another lender, you may need to pay LMI again with your new lender if you do not meet their minimum deposit requirements.

What if I’m unable to make my home loan repayments?

If you are unable to make your loan repayments and default on your home loan, your property may be sold to cover the outstanding loan amount.  If the property is sold for less than the outstanding loan amount, the Lender will incur a loss and submit a claim to the LMI provider. The LMI provider pays the Lender this amount (subject to the LMI policy) and the LMI provider or their authorised third-party debt collector may then seek to recover this amount directly from you as the borrower, or any guarantors.

For example:

Peter and Emma buy a home valued at $750,000. LMI is required and included (or capitalised) into the loan amount of $700,000. Unfortunately, Peter and Emma are unable to meet their loan repayments and default on their loan. The property is sold for a loss at $650,000. The outstanding loan balance at the time of sale is $725,000 made up of the original loan amount, unpaid interest that has accumulated during the default period and other fees/charges associated with the sale. This means there is a shortfall of $75,000 (being the difference between the outstanding loan balance of $725,000 and the sale proceeds of $650,000). In this case, the LMI provider would, pay the Lender the shortfall. The LMI provider may then seek repayment of this amount from Peter and Emma.

LMI vs. Mortgage Protection Insurance

LMI should not be confused with Mortgage Protection Insurance (MPI). MPI covers you if you’re unable to meet your mortgage repayments due to unemployment, death or disability. MPI protects you, whilst LMI protects the lender.

Experiencing financial difficulties

If you’re experiencing financial difficulties or think that you may be unable to make your home loan repayments, contact us on 03 9553 0271.

Source: NAB

Reproduced with permission of National Australia Bank (‘NAB’). This article was originally published at https://www.nab.com.au/personal/life-moments/home-property/buy-first-home/lmi

National Australia Bank Limited. ABN 12 004 044 937 AFSL and Australian Credit Licence 230686. The information contained in this article is intended to be of a general nature only. Any advice contained in this article has been prepared without taking into account your objectives, financial situation or needs. Before acting on any advice on this website, NAB recommends that you consider whether it is appropriate for your circumstances.

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Authorised Representative 298494
Interprac Financial Planning Pty Ltd 

Darryl Jopling

Senior Adviser

I have worked in the financial services industry since 1982 and as a Financial Adviser since 1999.

I have worked for large Financial Planning businesses, Membership based organisations and looked after the financial planning needs of clients within an Accounting Practice before starting my own business.

I am married, have 4 older children and a grandson and I am keen golfer with mixed results like many .

I have been through many of the strategies I talk with clients about myself and with my family.

I have been through the journey of seeing my parents move into Aged care and negotiated the difficulties and pitfalls of understanding the system for them and this gives me an excellent insight into what is required to assist families at this difficult time.

In a previous roll I used to run retirement seminars looking at Centrelink and Retirement Incomes and how to make these work for you. I have helped many of my clients with Aged Care advice when their parents needed to move into Nursing Homes. For many clients I assist them with superannuation, building wealth and protecting their loved ones with insurance.

I am supported by his, Licensee, Interprac Financial Planning’s in-house resources and ongoing technical, systems and training.

I am committed to understanding your needs and identifying strategies and products to help you achieve your goals.

My guiding principle as an Adviser is to design plans which help to provide my clients with clarity of purpose and the opportunity to build a solid financial foundation.
I will take the time to listen, explain things clearly and keep you informed throughout the advice process.

My experience is complemented by professional qualifications including:

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