Lenders Mortgage Insurance (often abbreviated to LMI) is a once off insurance premium paid by the borrower to protect the bank. It’s required by most lenders on loans that are seen as higher risk by the lender (generally greater than an 80% loan-to-valuation ratio).
For more information on loan-to-valuation ratios you may wish to read know how banks evaluate risk.
Lenders Mortgage Insurance Covers the Bank
It’s important to note that lenders mortgage insurance does not protect the borrower in any way.
It offers protection for the bank in case the loan goes bad and the lender is unable to recover the money they’ve lent and associated costs. In the event of default the mortgage insurer will reimburse the bank for any losses incurred and then pursue legal means against the borrower.
Lenders Mortgage Insurance covers the lender if things go wrong. Income protection or life insurance policies can assist in covering your own personal situation if bad times hit. It is important to consider your own risk insurances when applying for a loan.
As part of my service I always offer to refer interested clients to a qualified financial planner to assist with their own protection.
How Lenders Mortgage Insurance is Paid
The way in which lenders mortgage insurance is paid varies between all banks and lenders.
Most institutions will allow you to add the premium payment on top of your loan. This is known as capitalisation of your premium. By doing this you’re paying off the mortgage insurance premium over time rather than in a lump sum (which would require you to have additional funds and may affect your ability to purchase).
Some banks will allow you to capitalise mortgage insurance up to their maximum loan-to-valuation ratio (usually 90% or 95%).
Other lenders will allow you to add it on top up to 2% (in some instances you may have to partially pay for the mortgage insurance or increase your contribution). A select few lenders will allow you to borrow the full 95% and then fully capitalise the mortgage insurance premium (this often ends up being a 98%+ loan).
A small number of lenders may require you to pay the mortgage insurance separately.
A knowledgeable mortgage broker can show you ways to structure your loan to keep your mortgage insurance premium as low as possible.
How Much Does it Cost?
The cost of lenders mortgage insurance depends on a number of factors including:
- Total amount to be borrowed
- Purpose for borrowing
- First Home Buyer or Next Home Buyer/Investor
- Choice of bank/lender
- Loan-to-valuation ratio before mortgage insurance is capitalised
The chart below gives an indication of how mortgage insurance premiums increase (as a percentage of loan amount) relative to the loan-to-valuation ratio. It is important to note the big jump from a 90% loan-to-valuation ratio compared to 91%.
Saving Money on Lenders Mortgage Insurance
The cost of lenders mortgage insurance varies significantly from bank to bank. One of the advantages of using my mortgage broking service rather than going to the bank direct is that I can often save you significant amount on mortgage insurance premiums.
Ways in which I can do this include:
- Comparing rates of mortgage insurance between financial institutions.
- Showing you how contributing a little extra money can bring you down a risk tier and save you thousands.
- Ensuring securities aren’t cross-collateralised to reduce your costs and protect your interests rather than the banks (important for investors!).
Whilst you never want to pay more than necessary Lenders Mortgage Insurance should not just be seen as an extra cost to pay. Knowledgeable purchasers recognise it’s a tool to grow investment portfolios quicker or enter the market sooner. I’ll be covering these topics in future articles.
If you’re interested in obtaining finance for your mortgage please get in contact with me to see how I can assist.