Why is LMI bad?

What is lenders mortgage insurance?

  • Has been around since the mid 60's
  • Helps more people enter the market
  • Less risk to lenders, thus giving people opportunity for a loan

Lenders Mortgage Insurance, otherwise known as LMI, was introduced to protect lenders from borrowers who default on their mortgages. When there is a default from the borrower, the insurer pays out the lender for the loss.

LMI first came to Australia in 1965. It was introduced to support early homeowners and allow them to purchase their first home. In those days, a minimum of 5% could be deposited and 80% could be borrowed.

From 1986 onward, bank mortgages were deregulated. People could then borrow 95% instead of the restricted 80%. These days, some people of certain professions are offered 100% to lend to as they are very low risk.

Is LMI good or bad?

The bad

  • Increase cost and risks
  • Lack of clarity from lenders

As the lender takes risks to lend money, they need insurance to protect themselves. People who are unable to accumulate a deposit of 20% are riskier to loan to. LMI offers the lender protection from people who default on the lender. So, is it bad?

It can be. If you’re a borrower and you default on a property, the bank can take it away. The property might have decreased in value. Since the lender can’t make their money back, the borrower then owes the remaining amount to the lender.

It should now be clear that LMI protects the lender, not the borrower. If this is overlooked, you may find yourself unprepared for a potentially unexpected harsh situation.

The good

  • Allows more people to enter the property market
  • Gives more options to people in society
  • The greater the deposit the lower the LMI
  • Saves time

It can be difficult to raise the funds to receive a home loan. In the current housing market, it is even more difficult to raise a 20% deposit. Without LMI, there would be near no chance to receive a loan, as those who can't afford the 20% deposit are riskier borrowers.

Thus, LMI allows people who can't afford the deposit to enter the property market. Those who can afford some sort of deposit, can pay less for LMI as they are less risk. Once you hit the 20% threshold, LMI can be waived. It also allows you to enter the market sooner as it would take time to accumulate that 20% deposit.

Find out if your LMI can be waived by contacting Mortgage Providers on 1300 656 600. Our brokers work tirelessly to seek the most competitive loan product for our clients. Not only do we find the best LMI discounts, we ensure the entire process is smooth and transparent, keeping you informed every step of the way. Send us an online enquiry and one of our brokers will contact you.