What is LMI?
- Around since the mid 60’s
- Helps more people enter the market
- 20% deposit on loan
- Reduced risk for lenders
LMI refers to Lenders Mortgage Insurance and was introduced to protect lenders from borrowers who default on their mortgages. Whenever there is a default by the debtor, the insurer pays out the creditor for the loss.
When LMI was established, it helped people enter the property market. In those days, a 5% deposit could be made and 80% borrowed.
By 1986, bank contracts were free. Individuals could then borrow 95% rather than the restricted 80%. These days, some people of particular professions are offered 100 percent to lend to as they are extremely low risk.
Pay LMI when refinancing
Why is there LMI?
- LMI protects lenders
- It allows more people into the market
As the creditor takes risks to lend money, they need insurance to protect themselves. People that are unable to collect a deposit of 20 percent are riskier to loan to. LMI delivers the lender protection from people who default on the lending company. So can it be bad?
It could be. If you're a debtor and you default on a home, the bank can take it away. The property may have decreased in value. Since the creditor can not make their money back, the borrower then owes the residual amount to the lender.
It should now be clear that LMI protects the creditor, not the debtor. If that is overlooked, you may find yourself unprepared for a possibly unexpected harsh situation.
Do I pay for LMI while refinancing?
- The purpose of LMI is to protect lenders
- Other lenders are not protected under the umbrella of your initial LMI
- You may be eligible for discounts for LMI when using the same lender
As discussed above, LMI protects the lender not the debtor. If you go to a different lender to refinance, that lender is not under the protection of your initial LMI. Therefore, you are required to pay for LMI again unless you are eligible to waive LMI.
There are a few things to consider when refinancing. When you refinance with the same lender, as you have already paid LMI, they may offer discounts on the LMI of your refinancing. Our brokers can walk you through the refinancing process and get the best product for your unique situation. Send us an online enquiry and we will contact you and get the ball rolling on your refinance!