What is Lenders Mortgage Insurance?

One of the most exciting times in your life is, undoubtedly, achieving the dream of home ownership.

Home ownership does come with quite a large hurdle – the time it takes to save a substantial deposit that lenders will often require, which is typically 20% of the purchase price of your property.

In the event that you have not been able to save a substantial deposit, your lender may be prepared to provide you with a home loan with a smaller deposit (as little as 5%), when they take out Lenders Mortgage Insurance¹.

Breaking it down

Lenders Mortgage Insurance is an insurance policy that your lender takes out to protect itself against the risk that you (the borrower) default on your loan repayments and your lender is unable to recover the full outstanding loan amount.

In the simplest of terms:

• LENDER protects itself with Lenders Mortgage Insurance
• BORROWER buys a home sooner with a smaller deposit

Protecting the lender – not the borrower

Remember, Lenders Mortgage Insurance does not protect you (the borrower) or any guarantor.

It can sometimes be confused with Mortgage Protection Insurance. However, this is a separate insurance policy that protects you (the borrower) in the event that you are unable to make your loan repayments.

How would Lenders Mortgage Insurance help me?

Lenders Mortgage Insurance will enable you (the borrower) to obtain a home loan that may not have otherwise been available. It does this by reducing the deposit you are required to provide.

This means you will be able to:

• Buy a home sooner and stop paying rent; or
• Buy a more expensive property with the deposit that you have.

Lenders Mortgage Insurance could also enable you to borrow at an interest rate that is comparable to a borrower with a substantial deposit.

You only need to pay it once

Lenders Mortgage Insurance is arranged by your lender and the premium is a one-off cost your lender pays to us (the insurer) upon settlement of your property purchase. This cost is passed on to you (the borrower) by your lender, as a fee.

Your lender will tell you how much it will cost after you apply for your loan. The cost will depend on various factors including the size of your deposit and the type of loan you take out. Helia’s LMI premium calculator is an online calculator that can provide you with an estimate of the premium payable.

You may be able to add the cost of this fee to your loan amount, which means you will pay interest on it over the term of your loan. Otherwise you will need to pay it up front, before you have been provided with your home loan by your lender.

What about refunds?

The Lenders Mortgage Insurance fee that your lender charges you may be partially refundable if you terminate your loan within the first two years.

Alternatively, your lender may not provide a refund because it has arranged to receive a larger up-front discount on its Lenders Mortgage Insurance premium (instead of the right to a refund).

In this case the full amount of the discount will be passed on to you. So, if you were to refinance your home loan with another lender or increase your loan amount, you may be required to pay a Lenders Mortgage Insurance fee again.