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A common question we come across when speaking with our clients is, “what is Lenders Mortgage Insurance or LMI?”

Lenders Mortgage Insurance (LMI) is an insurance premium charged by the lender, to the applicant(s), where a loan to value ratio (LVR) is higher than 80% What is LVR? See our LVR information blog here. To avoid paying Lenders Mortgage Insurance the applicant(s) will need to have a minimum 20% deposit, and borrow a maximum of 80% of the property value,  for example if the applicant(s) wants to purchase a property for $500,000, the applicant(s) will need to have a deposit of $100,000 and will loan $400,000 from the lender.

For many people a 20% deposit is unattainable. For this reason, lenders offer higher loan to value ratio loans, and to cover their risk they have the applicant(s) pay for Lenders Mortgage Insurance. Lenders will lend a maximum 95% loan to value ratio and can either charge the Lenders Mortgage Insurance premium upfront or can capitilise it onto the loan amount. The Lenders Mortgage Insurance premium is usually around 2% of the loan amount. A maximum loan to value ratio inclusive of Lenders Mortgage Insurance is 97%.

Lenders Mortgage Insurance is not a way to protect the applicant(s). Lenders Mortgage Insurance purely protects the lender in the case that the applicant(s) cannot meet their loan repayment obligations and the lender foreclose on the property with the property selling for less than the loan amount. The Lenders Mortgage Insurance premium would then apply to cover the shortfall for the lender.

When applying for loans above 80% loan to value ratio there are some things to be aware of. Many lenders deem these loans as higher risk when compared to loans less than 80% loan to value ratio. As a result, the lending criteria is much tighter, and the loan application is also reviewed by the Lenders Mortgage Insurance Providers.

*All information is current as at July 2020