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What is 'Lenders Mortgage Insurance'?

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Lenders Mortgage Insurance or LMI is one of the bigger considerations when applying for a home loan.

Unlike a significant number of people believe, LMI does not protect the home buyer, it protects the lender should you default repaying the loan. It's payable to a third party to insure the bank against any losses, if you cannot repay the loan.

Lenders mortgage insurance should not be confused with mortgage protection insurance or income protection insurance, which covers borrowers for the payment of their mortgage instalments in the event of unforeseen circumstances including unemployment, illness or death.

LMI works like this. Lenders get concerned when a borrower tries to borrow more than 80% of the value of the property. This percentage is called the 'loan-to-value' ratio or LVR.

A bank assumes that if you were unable to pay your loan repayments and they had to sell your property, which is security for the loan, they may have to forgo some of the value of the property in order to sell it quickly. They ensure that they protect themselves by asking you for a 20% deposit meaning that the actual loan is only for 80% of the value of the property ie 80% LVR.

Of course there are circumstances where a borrower might be in a position where they need to borrow more than 80% LVR and in these cases, LMI is payable and can be a significant amount.

An important note about LMI; it's payable once for the life of a loan, but if you were to refinance for a better interest rate and the loan's LVR was still over 80%, then the LMI would be payable again.

Feel free to come and chat if you have any questions.