Lenders Mortgage Insurance or LMI is the name given to an insurance product that lenders will force a borrower to undertake when they fail to meet certain criteria. Typically, a lender will request the borrower takes out LMI when their deposit is lower than 20%. This can allow a borrower to take their borrowings up as high at 95%.
It is vital that borrowers understand what LMI does and does not cover. LMI is set up to protect the lender against a loss should the borrower default on their home loan. When a default occurs on a mortgage, the lender may then repossess the property that the mortgage is secured against and sell it. The sale of this property needs to cover all borrowings secured against it. If the sale does not cover the borrowings, the lender may then make a claim against the LMI for the shortfall. If a claim is submitted, the insurance company (normally Genworth) can attempt to recover this loss from the borrower.
Borrowers should consider taking out their own insurance to cover themselves against events such as death, sickness, unemployment or disability. This type of insurance is generally classified as Mortgage Protection Insurance.
If you have a client that is considering purchasing a property but does not have the 20%, please refer them to us. We are happy to talk them through the various borrowing and insurance options that are available. We are also able to connect them with insurance brokers who can give them independent advice.