What is Lenders Mortgage Insurance?

The RBA war with words continues. As discussed in last week’s newsletter, Tuesday’s decision to keep rates on hold was not unexpected, but as was the case last month, the RBA has some pretty strong wording wrapped around its decision.

So while the cash rate remains at 4.35 percent, major bank economists noted the hawkish tone from the board following its meeting.

RBA Governor Michele Bullock quickly dispelled any hopes of a reduction in interest rates this year during the post-meeting press conference stating that she believes market expectations of a rate cut in 2024 are “a little bit ahead of themselves” and that a rate cut is not on the board’s agenda in the near term.

Reacting to the board’s statements and decision, Westpac Chief Economist Luci Ellis noted that while the RBA left rates on hold as expected, their “rhetoric and view of aggregate demand were surprisingly hawkish.”

Westpac and the other big four banks are now all of the belief a rate cut won’t be delivered this year.

In this week’s newsletter, we take a look at Lender Mortgage Insurance and how it can get people with a low deposit into the property market sooner.

What is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (LMI) is a type of insurance that protects the lender in case the borrower cannot repay the loan and the property is sold for less than the outstanding loan balance. It is crucial to understand that LMI covers the lender, not the borrower or any guarantor, even though the borrower usually bears the cost of LMI. This means only the lender can make a claim under LMI. It is different from mortgage protection insurance, which a borrower might take out separately to protect themselves against the inability to meet loan payments.

How does LMI help?

LMI helps people buy homes by enabling them to secure mortgage finance even if they do not have a substantial deposit (typically 20%). If you meet other lender requirements but lack a large deposit, LMI reduces the lender’s risk of loss if you default on your loan. This reduction in risk makes lenders more willing to provide you with a mortgage despite your smaller initial deposit.

How is the LMI premium paid?

The lender pays the LMI premium to the insurer at the settlement of the home purchase. This one-time upfront payment covers the lender for the loan’s duration, which can be up to 30 years. The premium amount depends on the lender, the loan amount, and the size of your deposit. The lender usually passes the cost of this premium onto you as a fee. You can pay this fee at settlement, or it can be included in your loan, adding to your loan repayments over its term.

What happens if you cannot repay the loan and the home is sold?

If you cannot make your loan repayments and no other resolution is found, your property may need to be sold to cover the outstanding loan amount. If the sale proceeds are less than the loan balance, resulting in a shortfall, you are responsible for repaying the remaining amount. The LMI insurer will cover the lender’s loss according to the LMI policy. In the event of a shortfall, the LMI insurer may require you to repay the shortfall amount directly to them, rather than to the lender.

Variable

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.

1 Year Fixed

The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.