What is lender's mortgage insurance (LMI)
This article is part of a fictional case study series following "Sarah", a typical first home buyer in Victoria. Read each article to follow "Sarah" through a variety of articles exploring issues related to buying a home.
Even though she was putting down a 15% deposit on her home, the bank still said Sarah had to pay Lenders Mortgage Insurance (LMI).
Although she had heard about it before, she didn't really know what it was, or how it worked. So she spoke to her lender.
That's where she found out:
LMI stands for Lender's Mortgage Insurance.
It's just like any insurance policy that you would normally take out, except with LMI you don't own the policy. The bank does.
Why would they want to do that? Well, let's say you sell your property. LMI protects the bank if the sale doesn't bring you enough cash to pay the loan out. However, the home owner still needs to pay off the rest of the debt.
You do need to pay extra when a bank takes out LMI, but you do get the benefit of actually being able to take out the loan.
And it can be expensive too.
So, how can you avoid LMI? Make sure you put down 20% (plus costs) or more. It's not always possible, especially in Melbourne. But not even taking out LMI in the first place is the best practice.
It isn't the end of the world. But it's just another cost that, with some planning, you can try hard to avoid.
Sarah doesn't like the idea of paying LMI, but she didn't really have a choice. In the end, paying LMI was a way to get into her own house sooner.