What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance or commonly referred to as LMI, is an insurance imposed by the lender to protect the lender against a default on your home loan repayments.
Lenders Mortgage Insurance covers the “lender” and not you.
Traditionally lenders require you to have at least 20% of the purchase price as a deposit, commonly refer to as LVR or Loan to Value Ratio. If you borrow more than 80% LVR this is considered a higher risk loan and Lenders Mortgage Insurance will be imposed. Some lenders will allow you to borrow up to 95% of your purchase price, reducing the amount of deposit that is required.
There are many factors that effect how much LMI you will pay:
- The more you borrow, the greater the risk, the higher the cost of the insurance.
- The smaller the deposit the higher the cost of LMI.
- Your employment status and occupation can effect the perceived risk of lending to you.
- Some financial institutions, but not all, may vary the LMI between a principal place of residence and a investment property.
In 2015 the average loan deposit was 8.2% of the property value. Typically you can add the cost of the LMI premiums to your loan amount, however if you can avoid paying LMI you could save between $5,000 – $15,000 on the average mortgage.
You can avoid paying LMI, by increasing your deposit amount, having a family member as a security guarantor on your loan, or ask your lender for a loan where LMI is excluded for low risk professional occupations.
What is Mortgage Protection Insurance?
Mortgage Protection Insurance covers “you” and not the lender.
Purchasing a family home, for many of us, is going to be your biggest financial commitment. Naturally you will want to protect your ability to meet your loan repayments. Mortgage Protection Insurance (MPI) can provide peace of mind in knowing that if you are unable to work due to sickness, injury, redundancy or even death, you mortgage payments will be taken care of. MPI is similar to income protection insurance and life insurance for your mortgage.