LMI – Lenders Mortgage Insurance Explained

In this video as a part of my financial literacy
series, I am going to be looking at Lenders Mortgage Insurance?
What is it? When do you need it and who does it protect. Coming right up. Lenders Mortgage Insurance (LMI), is an insurance
premium that is paid by a borrower that protects the lender in the event that you default on
your mortgage. LMI may be required if your home loan deposit
is less than 20% of the assessed value of the property which you wish to purchase. For example lets say you want to purchase
a property valued by the lender @ $500K. You have a $75K deposit which is 15% of the value
of the property. This means you have a Loan to Value ratio of 85% which means you will
be required to pay LMI. The LMI premium payable in this scenario would
be approximately $5350. This premium can either be paid in full upon settlement or capitalised
into your loan, provided that capitalising the premium does not cause your loan to exceed
its maximum allowable LVR. Capitalising the LMI means that the premium
is added to your loan amount, which allows you to pay the fee over the life of the loan
rather than one lump sum at settlement. Now, if your deposit was only $50K this would
mean you have an LVR of 90%. The LMI premium payable would then be $8600. As you can see
as the perceived risk to the insurer increases so to does the premium payable. It’s really important that you understand
that LMI does not protect you the borrower at all! If you default on your mortgage and
the lender sells your property, any shortfall the lender suffers on the sale, is covered
by the LMI policy. In that event the LMI provider can come after
you or your guarantors, to recover the shortfall. As if it isn’t bad enough that you have lost
your property, you are still liable for any shortfall on the sale. So, for the past several years in Australia
property prices, particularly in Sydney and Melbourne, have been increasing rapidly. So
LMI has been a necessary option for many property purchasers, who literally couldn’t save fast
enough to keep up with a rapidly appreciating market. Currently property prices throughout Australia
are dropping and look likely to do so for the foreseeable future. This makes a 20% deposit
far more achievable as potential purchasers are no longer chasing a rising market and
can save a bit longer to build up their deposits. In closing, LMI can be a substantial cost
when buying a property and if you can avoid it you can potentially save thousands of dollars. Having said that sometimes the right property
appears at the wrong time and in those situations LMI can get you over the line when your deposit
isn’t quite enough. For me as a broker the important thing is
that my clients are fully informed so that they can make the most educated decision possible. I will leave a link below to the LMI calculator
I used in this video. As always, if you enjoyed this video please
leave a like and don’t forget to subscribe. If you have any questions let me know in the
comments below or better still visit my website and contact me directly. If you are in need of finance whether it be
residential, investment, vehicle, commercial or asset finance please give me a call and
lets see how I can help. Now for the Disclaimer:
All information provided here is general in nature and is specific to an Australian audience
and the Australian finance market. Thanks for watching and see you next time.

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