LMI was introduced by the Federal Government in 1965 to transfer the risk from the lenders to the insurers.
Without a 20% deposit, home buyers are usually required to take out LMI. Self-employed borrowers and non-residents may need to undertake LMI with the lenders deciding on a case-by-case basis.
LMI is required if borrowers are seeking a residential loan in excess of 80% and the cost to the borrower can be hefty. Many borrowers mistakenly believe that LMI is designed to protect them if they default on their loan, enabling them to retain their house. However, it actually protects the lender if the borrower defaults on their loan.
LMI is usually arranged by the lender during the loan approval process. The cost is agreed between the lender and the insurer and this cost is borne by the borrower. This is added to the loan as a one-off fee and is included in the borrower’s loan repayments. This means that the borrower pays interest on the LMI premium.
Recently, lenders have adjusted their maximum loan to security ratios inclusive of LMI to 95%. However, a major lender has reduced lending for self-employed borrowers for residential lending to 80%. The rate of the LMI premium increases significantly at certain borrowing thresholds.
For further details, please do not hesitate to contact Paul today on 1300 FLAKUS.
Tags: lenders mortgage insurance, LMI