This is a question I get asked all the time; What is lenders mortgage insurance? There too is a lot of confusion around lenders mortgage insurance, why it is charged and who does it protect?

Lenders mortgage insurance (LMI) is insurance that insures the home loan when you borrow more than 80% of the value the property that you are buying. For example, if the property you are buying costs $100,000 and you borrow $90,000 to purchase the home, you are borrowing 90% of the home value, so the home loan will be mortgage insured.

Mortgage insurance actually protects the bank or lender, should something happen and the home loan goes into to default and doesn’t get paid. Generally speaking, the mortgage insurance will guarantee the bank or lender they will suffer no financial loss, if for example the property is sold, and there is a shortfall in repaying the home loan back to the bank. The mortgage insurer will cover the difference to the bank, then generally speaking, pursue the customer of the home loan for the difference.

With most banks the LMI fee is paid by the customer, and the fee or most of it can be added to the home loan.

The LMI fee will differ between banks and lenders. The higher the loan value is, to the property value, the LMI fee will increase. For example, if the property value is $100,000 and you borrow $82,000 the LMI fee will be cheaper, than if you borrow $92,000 to purchase the same property.

The LMI fee too, will get more expensive too, the higher the loan is. For example, the LMI premium on a $92,000 loan on a $100,000 property will be a lot cheaper than a $920,000 loan on a $1,000,000 property (just an example to give you an idea)

With some banks and lenders, the mortgage insurance fee maybe slightly cheaper for first home buyers, but the fee will apply always, when you borrow more than 80% of the property value.

LMI is a once off fee per home loan, unless you apply for an increase with your home loan, and the loan value is still more than 80% of the property value. Some banks or lenders will still lend 95% of the property value and add all the LMI premium to the home loan, so it is worth contacting your mortgage broker, or myself, to discuss the finance options that may be available to you.

There may be an option available to you, to avoid mortgage insurance, and infact you may need no deposit at all, if you use a guarantor for your home loan.