Finance Broker Australia Home Loan Broker

Lenders mortgage insurance is an insurance policy which covers a lender for any unrecoverable loss which may occur as a result of providing a home loan.

The usual scenario used to be that lenders would not offer to lend any more than 80 percent of the valuation of a property which provided a 20 percent buffer should anything occur where borrowers could not repay a loan.

If borrowers could not repay a loan and a property was sold to recover the debt the lender could theoretically afford to sell the property quickly at up to 20 percent below market value and still recover their money.

Lenders mortgage insurance changed the options considerably for lenders and borrowers in Australia. Some lenders mortgage insure every home loan and only require the applicants to pay the mortgage insurance premium when the loan to value ratio exceeds their policy.

Generally this policy is where a low doc loan exceeds 60 percent loan to value ratio or a full doc loan exceeds 80 percent loan to value ration the borrowers are required to pay the mortgage insurance premium.

Lenders mortgage insurance, LMI, today allows for full documentation home loan applicants purchasing a property to borrow up to 100% of the property valuation or purchase price. (whichever is the lower)

How much is LMI? This question cannot be answered until the loan amount, loan to value ration and the lender is known.

The mortgage insurance premium is usually calculated as a percentage of the loan amount. This percentage often changes as the loan amount increases and the percentage in turn increases further as the loan to value ratio increases.

Provided the lenders maximum loan to value ratio is not exceeded, and the borrowers capacity is adequate, a lenders mortgage insurance premium may be capitalised on to the loan amount. If the lenders loan to value ratio will be exceeded the home loan applicants will need to contribute additional funds to avoid this.

In certain cases a personal loan can be used to make up this short fall.

Lenders mortgage insurance premiums usually incur a state stamp duty as well which is calculated on the total premium. For example NSW stamp duty on the LMI premium is currently 9 percent.

Lenders mortgage insurance cost will also vary between lenders. There are 2 main mortgage insurers operating in Australia and several smaller mortgage insurers while several lenders use their own mortgage insurance company.

Care should be taken in selecting a lender when mortgage insurance is payable. Any benefit of a lower interest rate could be more than lost if a mortgage insurance premium is higher than a competitive lenders option.

Another option used by several lenders is called a risk fee. A risk fee replaces the lenders mortgage insurance option and may be useful in cases where mortgage insurance is not available for one reason or another. Risk fees also do not incur stamp duty as mortgage insurance premiums do.

One way to avoid lenders mortgage insurance with out having 20 percent deposit available is to use a portion of another property as additional security.