Mortgage insurance is often misunderstood as cover for the borrower – that is not correct. LMI is insurance for the lender in case you can’t repay your mortgage. It applies when you don’t have sufficient deposit to keep the loan to valuation ratio below 80%. Some lenders may offer LMI waivers up to 90% LVR for certain professionals such as doctors.
The following are some critical points;
- LMI insures the lender – it offers you no protection
- LMI is not transferable – so if you refinance and your LVR is still above 80% you must pay LMI all over again.
- LMI is calculated as a percentage of the loan amount;
- the percentage increases as the loan amount increases – usually in stages;
- the percentage also increases as the LVR (loan valuation ratio) increases;
LMI can be 4% or more of the total loan amount and so it is a very important factor in how much you want to borrow. Apart from the additional expense, if you need lenders mortgage insurance it can make the approval process more difficult and protracted. For instance you might receive ‘in principal’ approval from the lender but it will be subject to further checks and testing to receive the mortgage insurer’s approval. And because they insure people with less equity, mortgage insurers are more careful in their assessment of your home loan. Therefore where a bank might accept someone who had switched from one job to another three months ago, the mortgage insurer might not be prepared to do so.
Once your broker understands your exact financial situation they can give you a reasonably accurate estimate, however rates vary between lenders.