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Answers to your questions

Lenders’ Mortgage Insurance (LMI) is insurance that a lender takes out to protect itself against the risk of not recovering the full loan balance, if you, the borrower is unable to meet your home loans repayments and you default on the loan. In the unfortunate situation that this occurs and the property is sold, any shortfall between the outstanding loan balance and the proceeds from the sale of the property will be paid to the Lender by the LMI provider. It is important to understand that LMI protects the lender, not you, the borrower or any guarantor.

Unlike traditional insurance premiums, LMI is a once-only fee payable at loan settlement that provides cover for the full term of the loan. Usually, your lender will pass on the cost of the LMI premium to you, the borrower, by way of an LMI fee.

The cost of LMI will vary depending on how much money you borrow and how much of the purchase price you pay from your own funds. The more you contribute the lower the cost of LMI. Additional discounts or loading may apply. You may be able to capitalise the cost of the LMI fee into your loan. Your lender or financial advisor will be able to provide details on the options that are available to you.

If you were to refinance your home loan to another lender, LMI may be payable again.

An important consideration when deciding how much to borrow is the size of your deposit. Most banks and financial institutions generally require you to have a minimum deposit of 20 per cent. As an example, with a purchase price of $500,000 you will need to have saved at least $100,000. In addition, you will also need to pay for any legal costs, government charges and/or moving costs.

If you don’t have 20 per cent deposit there is the option of using LMI, which could mean a deposit as low as 5 per cent, meaning the dream of homeownership can be a reality much sooner.

LMI has a one-off premium which the lender will pass onto you to pay. The premium can usually be added to your loan with your loan repayments adjusted accordingly. To calculate the approximate cost of LMI, use the LMI Premium Calculator.

By delaying your purchase to save a higher deposit, you may pay more in rent and, in the meantime, house prices may grow out of your reach.

If you wanted to purchase a property with a market value of $650,000:

  • Without utilising LMI, you will need $130,000 to cover the traditional 20 per cent deposit.
  • Utilising LMI, and assuming a 10 per cent deposit, you will require $65,000.

NOTE: the above examples make no allowance for any transaction costs, including stamp duty.

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 should not be confused with Mortgage Protection Insurance (MPI). MPI protects you, the borrower, may make some of your mortgage repayments, or pay a lump sum should certain specified events occur, such as unemployment, sickness, disability or death.

If you run into financial problems and cannot meet your loan repayments, you should immediately contact your lender. If no other resolution is found, your property may need to be sold to cover the outstanding loan amount. In this situation, sometimes the property is sold for less than the amount owing. If this should occur, the lender can make a claim against their LMI provider for the shortfall between the outstanding loan balance and the proceeds from the sale of the property. Once a claim has been paid, the LMI provider may pursue the borrower, and any guarantors, to repay this sum directly to them.

It is important to be aware that the lenders LMI provider may pursue you (as the borrower), and any guarantors for the shortfall.

For example:

John borrows $600,000 to buy a home valued at $650,000. As John’s deposit is less than what his lender requires, the lender obtains LMI and recovers this cost by way of a fee to John. John decides to add this fee to his home loan. John then becomes unemployed, is unable to make his home loan repayments and falls behind on his mortgage. The lender repossesses the home and it sells for only $550,000, leaving a difference of $50,000. The LMI provider, under the policy, pays John’s bank (as the lender) $50,000. The LMI provider then has the right to seek repayment of the $50,000 shortfall from John and any guarantor.

It is important to remember that if you are experiencing difficulty making home loan payments due to illness, unemployment or any other unforeseen circumstance, that you should speak to you lender as soon as possible.

Find out more about:

QBE LMI may try to recover costs incurred by us, for a claim paid on a defaulted loan.

If you are experiencing difficulty making payments due to illness, unemployment or any other unforeseen circumstances, you can ask our recovery agent to assess whether you are eligible for Financial Hardship assistance.

Important

If you experience problems making your repayments, you need to contact your lender as soon as possible.

Where can I go to find out more information?

You should contact your lender with any further questions you may have about lenders’ mortgage insurance and your loan.