What is Lenders Mortgage Insurance (LMI)?
LMI is an insurance policy that a lender may require if your loan to value ratio (LVR) is above 80%. This type of insurance protects the lender, rather than the borrower, in the event that the borrower is unable to make their loan repayments and there is a shortfall in funds from the forced sale of the property. This policy incurs a one off upfront fee from the lender.
The cost of Lenders Mortgage Insurance is dependent on the size of the loan and the LVR.
For example if you have a loan of $400,000 and your home is valued at $470,000 the LVR would be 85%. The LMI cost for this would be $4,605.72*
If you have a loan of $400,000 and your home is valued at $445,000 your LVR would be 90%. The LMI cost for this would be $7,939.38.*
If you have a loan of $400,000 and your home is valued at $422,000 your LVR would be 95%. The LMI cost for this would be $13,992.62.*
Whilst the cost of mortgage insurance can be high, it means that people with small deposits may still be able to purchase a home. Banks will often lend up to 95% of the purchase price of a property subject to LMI. Without it you would have to have a 20% deposit!
*Costs are as at 13/04/2016 and are rates used by the NAB. Costs may vary slightly between lenders and are subject to change.