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The basics of the Lenders Mortgage Insurance

Lan Bell Lan Bell , 6/7/2018
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This is an insurance payable to a lender for a pool of insecurities that may be required when taking out a mortgage loan. This Insurance type helps thousands of people each year to purchase their dream homes. The insurance broadens the number of borrowers by taking some of the risks of lending the money off the lender.

Lenders Mortgage Insurance* protects the lender against an event where the borrower defaults on their home loan. When borrowers agree to loan borrowers’ funds, there is always the risk of the customer being unable to meet their repayments. Although lenders use their customer’s house as security, if the value of the property declines, the security may not be enough to cover the outstanding loan amount.

However, hypothecation Insurance is not the same as Mortgage Protection Insurance which covers borrowers in unforeseen circumstances such as illness, unemployment or death. For clarification on anything involving LMI for the Australian market, please check this great LMI guide.

How does Mortgage Insurance benefit me?

Before LMI was available for lenders, they would ask for a deposit of 20 percent to guard against the risk of the property being sold at a value lower than the outstanding loan amount. LMI gives the ability to pass on this risk to the lenders. Insurance companies are prepared to accept a lower deposit as well as offer lower interest rates than they would otherwise offer borrowers for mortgage lending.


This means that more people are getting loans and the homes they want much sooner. Many borrowers are able to buy property or purchase a home much earlier than they would have due to the reduced deposit and minimized mortgage lending interest rates.


Who pays the Lenders Mortgage Insurance Premium?

The Mortgage Cover premium is always passed on to the borrower. Customers pay lenders insurance premium as a cost for providing the loan. LMI premium cost is payable once, during loan settlement. The amount may vary depending on how much money the customer has borrowed and the size of their deposit. Lenders Loan Insurance premium can be paid upfront but most lenders allow the premium to be capitalized into their borrowers' loan.

The amount of money you pay as LMI depends on various factors including your insurance provider.
Check several case studies related to Australia (
here). Most lenders do not require customers borrowing more than 80 percent of their property purchase price to pay LMI. Some lenders will lend their customers up to 85 percent of their property purchase price before asking for LMI fee.

Growing your deposit before committing to paying mortgage insurance can be a smart financial decision. Save up to 20 percent deposit of your purchase. LMI is also applicable to borrowers who do not have a strong credit history. Thus, it is important to maintain financial discipline in order to save up money.

 

Conclusion

When making some of the biggest purchases in your life such as a home, it pays to have an expert by your side guiding you all the way. Your mortgage broker can lead you to the best lenders fit for your unique situation because brokers are aware of different lenders requirements. They can help you save thousands of dollars on your home loan in terms of lower interest rates and lower LMI payments.

*Details applicable to Australian LMI processes.