What is lenders mortgage insurance?
Lenders mortgage insurance (LMI) is insurance that protects the lender in the event that the borrower defaults on their home or investment loan. If the security property is required to be sold as a result of the default, the net proceeds of the sale may not always cover the full balance outstanding on the loan.
Should this be the case, the lender is entitled to make an insurance claim to Genworth for the reimbursement of any shortfall. Where a claim for loss is paid to a lender, Genworth may seek recovery from the borrower, or any guarantor, for any shortfall amount.
By taking out LMI, a lender reduces its risk at the outset, allowing borrowers to secure a loan with a deposit as low as five per cent. This takes much of the difficulty out of saving a deposit for prospective home buyers.
Who is insured?
The lender is the insured party, not the borrower, nor any guarantor. Where a claim for loss is paid to a lender, Genworth may seek recovery from the borrower, or any guarantor, for any shortfall amount.
LMI should not be mistaken for mortgage protection insurance, which covers the borrower’s loan in the event of death, sickness, unemployment or disability.
Why does a loan require LMI?
Typically, most lenders will require LMI be taken on all loans with an LVR of 80 per cent or more. By taking out LMI, a lender reduces its risk at the outset, allowing borrowers to secure a loan for a home or even their second home or property with a deposit as low as five per cent. This takes much of the difficulty out of saving a deposit for prospective home buyers.
What costs are involved?
Unlike traditional insurance products, there is a one-off premium payable for LMI. This premium is charged by the LMI provider to the lender, who typically passes this cost on to the borrower. The premium is payable when the loan funds are advanced and it provides cover for the full term of the loan.
The cost of LMI varies depending on a number of factors, including but not limited to; the amount of the loan, the level of your equity in the security property (how much savings a borrower contributes to the purchase) and the level of risk associated with the particular loan product the borrower chooses.
Some lenders will allow borrowers to add the cost of the LMI premium on to their loan, meaning they will not have to pay this amount upfront. The loan repayments will increase marginally to cover the cost of the LMI premium.
Do first home buyers receive a discount on the LMI premium?
Yes, typically first home buyers will be able to take advantage of a discounted LMI premium.
Is stamp duty and GST payable?
GST is payable on all LMI premiums and will be included in the premium quote. Stamp duty is also payable on the LMI premium and varies according to the state or territory location of the security property. Where applicable, this amount will be included in the premium quote.
Is the premium refundable?
A partial refund of the LMI premium may be applicable if the loan is repaid within the first two years. Sometimes a partial refund is not payable as a lower LMI premium may have been charged to the borrower upfront. These arrangements vary by lender and other conditions may also apply.
How is LMI arranged?
The lender or broker will prepare all the necessary information and documentation and will advise the borrower whether or not their loan requires LMI, the cost of the premium and any additional information that may be required.
What can a borrower do if they are having difficulty meeting their loan repayments?
A lot of people face unforeseen challenges in their life or their circumstances may change unexpectedly. This can often mean a borrower may experience difficulties in meeting their loan repayments.
If this happens to a borrower, the most important thing for them to do is to contact their lender immediately. There are a number of ways the lender can assist the borrower if they are experiencing hardship, and it is always best to contact them early.
Genworth, as well as the lender, has programs in place to assist borrowers if they find themselves in financial hardship.