Understanding Lenders' Mortgage Insurance

How it works and how it can help you secure your dream home

Many of us aspire to owning a home; a place to call our own. For some it’s the Aussie dream of a quarter-acre block, for others it’s a chic city unit, or perhaps a peaceful place in the country.

Either way, it can be tough to save a deposit to make that dream happen. That’s where Lenders’ Mortgage Insurance (LMI) can help.

What’s LMI?

LMI is an insurance policy that protects a financial institution – such as a bank, building society, credit union or non-bank lender – when they lend you money to buy a home.

Although the lender has your home as security, if you’re unable to make your mortgage payments and you default on your home loan, they may not be able to recoup the money they’ve lent you. LMI covers that potential loss.

How does it benefit you?

Traditionally homebuyers needed to provide a 20% deposit to secure a loan. This was how lenders protected themselves against the risk of their customers defaulting.

Since LMI reduces that risk, lenders can issue home loans with smaller deposits, say 5% or 10%. This makes home loans more affordable in the short term and could significantly reduce the time it takes you to save a deposit, helping you turn your dream into reality.

Who pays LMI and how much is it?

Generally you’ll pay the LMI premium on behalf of your lender, but circumstances can vary depending on the lender and parameters of the loan. It can be incorporated into your loan repayments (i.e. added to your home loan) or paid as a lump sum upfront. The cost depends on how much money you’re borrowing and the size of your deposit.

Do I have to apply for LMI?

No. Your lender will do this as part of your loan package.

Want more information?

Visit QBE LMI for a comprehensive overview of Lenders’ Mortgage Insurance.

Alternatively, you can contact the Mortgage and Finance Association of Australia (MFAA) for more details at 1300 554 817 or www.mfaa.com.au.

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