You pay for LMI. Does it protect you?
Lenders mortgage insurance can sound like insurance for the borrower who pays the cost. It is not. Australian Government Moneysmart explains that LMI protects the credit provider if the borrower cannot repay the home loan.
LMI does not protect the borrower or guarantor. Paying the premium does not give the borrower a payout if repayments become unaffordable, and it is not a substitute for income protection, life insurance, building insurance or contents insurance.
The borrower may pay while the lender receives the protection
Moneysmart says LMI is usually a one-off cost and may be required when the amount borrowed exceeds 80% of the property's value. The exact threshold, amount and any exemption still depend on the lender, insurer, property and application.
The deposit affects the loan-to-value ratio, or LVR. A smaller deposit usually means more borrowing relative to the property's value, which may lead the lender to require LMI. This is not automatic for every loan above 80% LVR.
Check whether the cost is paid upfront or added to the loan
The LMI cost may be paid at settlement or added to the loan. If it is capitalised, the starting loan balance increases and interest may also apply to that added amount over the loan term.
Before committing, ask for the written LMI amount, the payment method, the total loan balance after capitalisation and the resulting repayment. Also confirm whether any government scheme or lender policy changes the LMI treatment for the application.
Compare the deposit, LVR and total loan cost together
BV Finance can help assess eligible home-loan options using the proposed deposit, property value, LVR, LMI and total cost after capitalisation. Approval and final costs remain subject to the lender, insurer and individual assessment.
Sources and practical tools
General information only. This is not financial advice. Loan options and eligibility depend on your personal income, liabilities, assets and lender assessment criteria.
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