Mortgages and Financing

Mortgage Insurance

Mortgage insurance ensures protection of the lenders in events where the borrower defaults in repaying the loan amount. Mortgage insurance is also known as Lenders Mortgage Insurance (LMI).

LMI is an insurance that protects the lender or the bank who is lending to a borrower, in the event the borrower defaults or unable to pay his/her repayments on the home loan.

You will need LMI if you are borrowing more than 80% of the value of the property for Standard Home Loans or 60% of the value of the property for Low Doc Loans.

In case you are a self-employed person and you are unable to show that you have fixed income every month, then you may apply for a Low Doc Loan with the help of a LMI to borrow 60% of the value of the property.

LMI is an insurance which actually protects the lender and not the borrower. You do not need to worry about the additional paperwork regarding your LMI. The lender arranges for the LMI from their end and it is normally been processed from the lender’s centralised mortgage processing centre.

The concept behind having a LMI is basically to avail an opportunity to purchase a property with a smaller deposit and also securing the loan from the lenders’ perspective.

You may choose the option of paying the LMI premium by adding the premium to your total loan amount which is also known as LMI capitalisation or get the premium deducted from the total loan amount when it is processed.

LMI premiums are calculated using the LMI Rate Chart or the Premium Table.

Generally the insurers calculate the premiums by charging a percentage of the loan amount and percentage of the value of the property the borrower is intending to buy. This process is also known as Loan to Value Ratio or LVR.

For example, if a borrower is borrowing an amount of $340,000 as a home loan and the value of the property is $400,000, the borrower is actually borrowing 85% of the value of the property which is also known as 85% LVR. The amount of risk involved in this particular case is low because the borrower is borrowing only 85% of the value of the property and so the LMI premium amount would also be a small amount which would range between $1,500 to $2,200.

Lenders used to provide only up to 80% of the value of the property as home loans till the year 1965. So it was difficult for the borrowers to buy a property who were planning to buy their first property.

It was also not possible for the lenders to lend money for more than 80% of the value of the property to the borrowers because there is always a risk involved of losing the money if the loan is not paid back.

LMI insures the lenders that in case the borrowers are unable to repay back the home loan, they can take care of the loan on behalf of the borrowers.

The mortgage insurers also need to approve the LMI and this is a part of approval process of the home loan application. The mortgage insurers are very conservative in approving the LMI applications because there is always a high risk involved with the home loans where there is a low or no deposit at all. Before approving the LMI, the insurers check the borrower’s employment history, credit history and their savings record.

If you have any query pertaining to mortgage insurance, feel free to contact OH Mortgage.

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