What is LMI and what does it cover?
Lenders Mortgage Insurance (LMI) is a type of insurance that a lender takes out to protect itself against the risk of not recovering the outstanding loan balance. Specifically, this occurs where a borrower becomes unable to meet their required loan repayments and the proceeds from the sale of the property fall short of paying the outstanding loan balance in full (known as ‘shortfall debt’). The LMI insurer can recover from the amount of the shortfall from the borrower.
LMI is payable by a lender where the borrower does not have the required loan deposit (typically 20% of the property value). This cost is generally passed on as a fee to the borrower. LMI will be added to the borrower’s home loan balance and interest will be payable on this amount over the life of the loan.
It is important to note that LMI protects lenders against potential losses and not the borrower (or any guarantors). This means a borrower cannot make a claim under the LMI, only the lender can. LMI is different to Mortgage Protection Insurance, which a borrower can take out separately to insure themselves against the possibility that they are unable to meet their repayment obligations.