Lenders Mortgage Insurance (LMI) can be used to buy a property without having the 20 per cent deposit which is typically required by most lenders. A lender may be prepared to provide a home loan with a deposit as little as five per cent by taking out LMI.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is an insurance policy that a lender takes out to protect itself against the risk that the borrower defaults on the loan repayments and the lender is unable to recover the full outstanding loan amount.
Lenders Mortgage Insurance protects the lender and not the borrower
It is important to note that Lenders Mortgage Insurance does not protect the borrower or any guarantor. It should not be confused with Mortgage Protection Insurance which is a separate insurance policy that protects the borrower if they are unable to make repayments on their loan.
How does Lenders Mortgage Insurance help the borrower?
Lenders Mortgage Insurance enables the borrower to obtain a home loan by reducing the deposit they are required to provide. This means they will be able to:
buy a home sooner and stop paying rent; or
buy a more expensive property with the deposit that they have.
Lenders Mortgage Insurance payment options
Lenders Mortgage Insurance is arranged by the lender and the premium can be a one-off cost the lender pays to Genworth upon settlement of the property purchase or it can be paid by the month over the policy term. This cost is passed on to the borrower by the lender as a fee.
The lender will advise how much it will cost after the loan application. The cost will depend on various factors including the size of the deposit and the type of loan. Genworth’s LMI fee estimator is an online calculator that can provide an estimate of the LMI fee payable by the borrower to the lender to take out LMI.
Case study – What are the benefits of using LMI?
Jenny and Tom have found a home they want to buy for $500,000. Typically, they would need a 20 per cent deposit ($100,000) to secure a loan from their lender. By taking out Lenders Mortgage Insurance, their lender is prepared to provide a loan up to 95 per cent of the value of the home.
This means that Jenny and Tom can secure a home loan sooner with a five per cent deposit ($25,000) and stop paying rent. Their lender passes on the Lenders Mortgage Insurance premium cost to Jenny and Tom by way of a fee.
The Lenders Mortgage Insurance protects the lender if Jenny and Tom default on their loan repayments.
Source: Genworth March 2022