The short answer is that lenders’ mortgage insurance (“LMI”) is insurance the bank takes out to protect itself in the event a borrower defaults on their mortgage. Although the bank has a mortgage registered against your Cairns property which must be paid out as part of any sale, there is a risk that the property may not sell for enough to pay out the mortgage. This is where LMI comes in – it will protect the bank against any financial loss which they might suffer as a result of a borrower defaulting on their mortgage.
Whilst it is designed to protect the bank, the cost of LMI is usually passed along to the borrower. This may seem unfair, but without LMI there is a good chance your bank might not be able to lend to you at all. LMI allows banks to pass on the risk and safely lend to people who don’t have a 20% deposit at a lower interest rate than they might otherwise be able to offer. It also means that you might be able to borrow a little more than you thought and buy a more expensive property which might better suit your needs.
If you are borrowing 80% or more of the purchase price of a property, you will be required to pay LMI. The cost depends on both the amount you are borrowing and how much of your own cash you are putting towards the purchase. This means you can reduce your lenders’ mortgage insurance cost by either buying a less expensive home or putting more of your own money towards the purchase.
The good news is that unlike most insurance policies, LMI is a one-off cost. Your lenders’ mortgage insurance fee will be due and payable at settlement. Many lenders will allow you to include the LMI fee in your mortgage if you do not have cash available to pay for it upfront but you will pay interest on this amount for the life of your loan.
It is especially important to consider LMI when refinancing. If you refinance for a better interest rate and you are still borrowing 80% or more of the value of your property, you will have to pay LMI to your new lender as it is not possible to transfer LMI between lenders. Lenders’ mortgage insurance may cost more than you would save because of a lower interest rate so make sure you check your figures carefully to ensure refinancing will actually save you money.
If you have any questions about LMI or your home loan, please feel free to contact us at Preston Finance in Cairns on ph 4052 0750. Whatever your house finance needs, we can assist you through the process. We are dedicated to finding you the best home loan and will do all the hard work for you, so you can have time to enjoy more important things!