What is Lenders' Mortgage Insurance (LMI)
- What is Lenders' Mortgage Insurance?
- What does QBE LMI insure?
- Who uses lenders' mortgage insurance?
- How does lenders' mortgage insurance benefit me?
- Who pays the lenders' mortgage insurance premium?
- What is the cost of LMI?
- How is the fee for lenders' mortgage insurance paid?
- Is LMI refundable?
- What happens if I can’t meet my mortgage repayments?
- How do I apply for lenders' mortgage insurance?
- Where can I go to find out more information?
Lenders' mortgage insurance protects your lender in the unfortunate event of you defaulting on your home loan. When lenders agree to lend a customer money, there is a small risk that they won't get the money back if the customer is not able to meet the repayments. Although they have the house as security, if property values decline that security may not be enough to cover the outstanding loan when the lender comes to sell it.
This insurance helps lenders broaden the net of who they are able to lend to by taking some of the risk out of lending the money. It means that more people are likely to get a loan and the home they want sooner.
Lenders' mortgage insurance should not be confused with mortgage protection insurance, which covers borrowers for the payment of their mortgage instalments in the event of unforeseen circumstances including unemployment, illness or death. This insurance is paid annually and can vary depending on the outstanding balance of the loan.
QBE LMI insures mortgage loans for residential property in Australia and Asia. This includes houses, townhouses, home units, villas, vacant land and semi-detached homes. Each individual property and the proposed loan are reviewed against established criteria to determine if lenders’ mortgage insurance will be offered for a particular loan.
Lenders' mortgage insurance is taken out by Banks, Building Societies, Credit Unions and non-banks lenders. Lenders' mortgage insurance providers are heavily regulated by government authorities. The purpose is to make sure the insurers hold enough money in reserve to pay all likely claims. These reserves, with government regulation, gives lenders the confidence to offer competitive loan terms to prospective home buyers. This shows the important role that QBE LMI plays in the home loan lending market.
Before lenders' mortgage insurance was available, lenders usually required a deposit of around 20% to protect themselves in the event of foreclosure. This was to guard against the risk of the property being sold at a price less than the outstanding amount of the loan.
With the ability to pass on this shortfall risk to an insurance company through lenders’ mortgage insurance, lenders have been prepared to accept a lower deposit and also to offer lower rates for mortgage lending than they would otherwise be able to offer borrowers.
The end result is that home loans are available to more people.
By reducing the deposit required and helping to minimise lending interest rates, many borrowers are able to purchase a home much earlier, or buy a better property, than they would otherwise have been able to afford before lenders' mortgage insurance.
If you do have a deposit of 20% or more, then you have the choice of whether to borrow more, using your available funds for other priorities such as furnishings or renovations.
For property investors, lenders' mortgage insurance allows borrowers to have higher borrowing ratios, giving them the opportunity to maximise negative gearing benefits.
The lenders’ mortgage insurance provider's policy is with the lending institution. The premium is usually passed on to the borrower as a cost of providing the loan.
Unlike traditional insurance premiums, LMI is usually a once only premium (cost) payable at loan settlement that provides cover for the full term of the loan. Usually, the lender will pass on the cost of the LMI premium to the borrower as a fee.
The cost will vary depending on how much money you borrow and the size of your deposit. Most lenders allow the premium to be capitalised into your loan or it may also be paid upfront. Your lender will provide details to you.
GST is payable on all LMI premiums and is included in the total cost quoted by your lender. Subject to various State Government regulations, stamp duty may also be payable on LMI insurance premiums. Where applicable, this amount is also included in the total cost.
Lenders’ mortgage insurance in most cases is charged as a one-off premium. The amount will vary depending on how much money is being borrowed and the size of the deposit, if any.
Depending on the lender, the type of loan and the lenders’ mortgage insurance product, it is often possible to add the premium to the borrower's overall loan amount. This avoids having an upfront payment and spreads the cost of the insurance over the loan as a whole. Borrowers should ask their lender about this option.
GST is payable on all lenders' mortgage insurance premiums and is included in the premium rate quoted by lenders. Subject to various State Government regulations, stamp duty may be payable on lenders' mortgage insurance premiums. Where applicable, this amount is included in the total premium quoted.
In some cases LMI may be partially refundable if your loan is terminated early in the life of the loan. This will depend on the arrangements between your lender and their LMI provider. Sometimes LMI is not refundable as a lower LMI premium may have been charged up front. Your lender can advise whether this option may apply to you.
If you are having difficulty paying your mortgage you should contact your lender immediately. Your lender and the mortgage insurer will work together to try and find a solution that keeps you in your home. Click here for information on Hardship Assistance.
You don’t need to. Your lender will prepare and provide all necessary documentation and information should your mortgage require lender’s mortgage insurance.
In order to qualify for lenders' mortgage insurance, your lender will check to ensure you are able to make the repayments on your loan, and that property you want meets the appropriate lenders’ mortgage insurance underwriting guidelines.
You can contact your lender with any further questions you may have about lenders' mortgage insurance and your loan.
Alternatively, you can contact the Mortgage & Finance Association of Australia (MFAA) for more details.