Are you a mortgage broker wanting to learn a little bit more about some of the many types of insurance a lender may offer? Many brokers find it useful to learn a little more about what they’re about to get themselves into. One of the most common questions people ask is about lender’s mortgage insurance (also known by its initialism – LMI). This article seeks to help you better understand what lender’s mortgage insurance is and whether or not it will effect your job as a successful mortgage broker.
What is Lender’s Mortgage Insurance (LMI)?
Lender’s mortgage insurance is a type of insurance that the lender (the instituion financing the loan – usually a bank) takes out so that they are better able to lend money to borrowers (the home owner) who have a smaller deposit when purchasing a mortagage. Traditionally, most people try to have a sizeable down payment, but this type of insurance is directed towards borrowers than are trying to finance greater than 80% of the value of the property. These types of mortages are generally more risky for the lender, and LMI lets Australian borrower’s take out the loan they need without more risk on the part of the lender.
What does LMI do?
Lender’s mortgage insurance is a one time purchase in the form of an insurance premium through a mortgage broker melbourne that protects the lender in case the worst happens and you default on your mortgage. Although the home itself may act as “security” for the loan, an LMI provides extra coverage in the event that the sale of your property with all fees included does not cover the entirety of your loan. This can happen a lot when the market is down.
When do you pay for the LMI?
The lender will pay for this insurance and the cost is generally added to the loan and included in their monthly payment.
How much will the LMI cost?
The cost of the LMI depends on the amount you are borrowing. Generally speaking, the higher the percentage you’re wanting to take out, the more expensive the premium will be. Expect around several thousand dollars. If you’re like to do a rough calculation yourself, plug the numbers you’re expecting into this helpful calendar (http://www.genworth.com.au/online-tools-forms-and-reports/lmi-tools/lmi-premium-estimator). You can also check with your mortgage broker.
What happens to the LMI if I decide to refinance?
This type of insurance is lender specific and can not be transferred. You may have to pay the cost again if you do decide to refinance, which may outweigh the positive benefits of refinancing your loan. Before you decide, speak with your lender or your mortgage broker. They will help you make an educated decision.
How can you avoid having to pay for LMI?
The best way to avoid paying for LMI is with good financial planning. If you’ve saved more than 20% of the loan cost as a down payment, you will not have to take this type of insurance out. If you aren’t able to do that, consider asking for help via a gift or a guarantor (usually a family member who will offer their property as additional security).
Lender’s mortgage insurance (or LMI) is best avoided, if possible, by working with a qualified mortgage broker and with good financial pre-planning to allow for as large of a down payment as possible. Check out www.mortgagebroker247.com.au for additional information.