What is LMI?
LMI is a type of insurance that lenders purchase to protect themselves in case a borrower defaults on their home loan and the sale of the property doesn’t cover the outstanding loan balance. While LMI primarily protects the lender, it also offers significant benefits to borrowers. It allows them to secure home loans sooner, even without the typical 20% deposit, helping them break the rental cycle. Additionally, LMI can assist borrowers looking to upsize or refinance their home loan, provided they meet the lender’s requirements.
Who does it protect?
LMI is designed to protect the lender, not the borrower. If a property is sold and the sale proceeds don’t cover the outstanding loan balance, the lender can claim the shortfall from QBE LMI, which will then pay the lender according to the LMI agreement. We can seek repayment from the borrower for any shortfall we’ve covered.
Borrowers, on the other hand, have access to various insurance products that can help them repay their home loan in case of events like job loss or illness. It’s advisable for borrowers to discuss these options with their financial institution. These products are different to lenders’ mortgage insurance.
How does LMI work?
LMI is required by lenders when borrowers have a lower deposit, usually less than 20% of the property’s value. These high loan to value ratio (LVR) loans are riskier for lenders. LMI allows lenders to transfer this risk to a specialised mortgage insurer like QBE LMI, enabling more lenders to offer high LVR loans. When the home loan starts, the lender pays the premium to us. They may pass this cost onto the borrower as a one-off fee or it can be added to the cost of the home loan.
How does LMI help borrowers?
The most obvious advantage is that borrowers can cut down on time spent saving and purchase a property sooner.
Whether it’s as a homeowner or investor, borrowers can start building equity in that property, which can be used for a range of other purposes down the line – growing an investment portfolio, getting a loan for home renovations or buying a bigger home.
Frequently asked questions (FAQs)
The lender will pay the LMI premium to us as a single, up-front premium at the start of the policy, which is usually on settlement of the mortgage. LMI provides protection to the lender for the entire life of the loan, which can be up to 30 years. The cost of the LMI premium is typically passed on by the lender to the borrower as a fee. Borrowers can either pay the LMI fee upfront or capitalise the cost into the loan amount. The lender can provide details of the fee options available to borrowers.
The cost of LMI predominantly depends on the loan size and LVR rather than borrower characteristics, such as employment type, location, or credit score. This is advantageous for many borrowers because it increases the accessibility and affordability of home loans.
There’s a big difference between LMI and mortgage protection insurance.
Lenders’ mortgage insurance (LMI) protects the lender in case the borrower defaults on their home loan and the sale of the property doesn’t cover the outstanding loan balance. LMI is purchased by the lender and the cost is typically passed onto the borrower.
Mortgage protection insurance (MPI) protects the borrower by making certain mortgage repayments on their behalf or paying off a lump sum of the mortgage in specific circumstances, such as involuntary unemployment, sickness, accident, or death.
If a borrower can’t repay their home loan, the property might be sold. If the sale doesn’t cover the outstanding loan, the lender claims the shortfall from us. Then we pay the lender the difference between the loan balance, sales costs, and sale proceeds. After paying the lender, we may seek to recover the shortfall from the borrower and any guarantors.
Financial hardship happens when borrowers can't meet a loan repayment. Getting help may involve negotiating with the lender to modify repayment terms or establishing a payment plan.
For more information, visit our hardship assistance page.
In some cases, LMI may be partially refundable if your loan is repaid early. This will depend on the arrangements between your lender and their LMI provider.
LMI cannot be transferred to a new lender. When switching lenders, the terms of the loan often change and since LMI is calculated based on the original loan terms, it cannot be transferred to a new loan with different conditions. If you switch lenders and still require LMI, you will need to pay for a new LMI premium with the new lender.
If you have a question regarding LMI on your home loan, you should contact your lender.
Case study
Eddie borrowed money from his lender to buy a home.
His lender required LMI cover on his home loan because he didn’t have the required 20% deposit. Eddie later lost his job and was unable to continue making his home loan repayments. Eventually, the home was sold for less than the balance of the loan. This left a shortfall, which he still owed.
His lender claimed on the LMI policy, the shortfall was paid to Eddie’s lender and the debt transferred to QBE LMI.
QBE LMI reached out to Eddie to agree how he could repay the shortfall to us, not his lender.
Note: the above does not take into consideration any fees, charges or transaction costs.