While LMI can be viewed as being exclusively beneficial for lenders, we explore the value for first home buyers.
LMI is insurance that covers the lender’s risk within a residential mortgage transaction should the loan go into arrears and the borrower is unable to resolve the situation satisfactorily e.g. if the lender sells the property and there’s not enough to pay out the loan in full. LMI is a fairly common practice within the industry, particularly for new home buyers who may struggle to save a deposit. It usually applies when the loan is more than 80 percent of the purchase property’s price.
LMI is a one-off up-front insurance premium that is added to the loan amount borrowed. It is not to be confused with mortgage protection insurance (which is designed to protect the borrower).
The purpose of LMI is to ensure security for the lender in case the borrower fails to make loan repayments. Even though the actual house acts as security, the nature of the property market, like any investment class, means there is a chance that its value could decline, resulting in a financial loss for the lender.
The cost of the premium is dependent on several factors, such as the loan size and property value. It is generally not transferable, which means a new loan may require a new fee depending on how much equity the borrower has.
What’s in it for me?
While it may appear that it is exclusively favourable to the lender, there is value to borrowers in paying the premium. Opting for LMI allows a borrower to purchase a property sooner than they otherwise might. LMI is the alternative to using a family security guarantor or having to save a bigger deposit.
Generally, a deposit of at least 20 percent of the property purchase price is required for a borrower not to be deemed ‘high-risk’ and so avoid the need for LMI. LMI can mean that borrowers with smaller deposits are able to enter the market sooner rather than later.
The major benefit of LMI is that it allows the dream of homeownership to become a reality for a lot of first home buyers.