To put it bluntly Lenders Mortgage Insurance (LMI) is an insurance put in place to protect the BANK !!!
Many people mistakingly believe that because they paid LMI that they are the ones who get protection if they aren’t able to make their mortgage repayments (similar to income protection) However, this is not the case.
When borrowing a large percentage of the value of your home this is a risk to the bank. If we look at a worst case scenario where you have borrowed 95% of the value of your home, then one day you are no longer able to keep up with the repayments. The bank can force you to sell your home, if your home sells for less than what you owe then the bank would be at a loss. Banks do not want to take this risk and this is why they enforce LMI as being a required thing with loans that are at a higher Loan to Value Ratio (LVR). By the insurance being taken out it means that if the worst case scenario does occur the bank is able to make a claim against the insurance to recover any loss.
The LMI fee is not an upfront cost, it is simply added on to you loan.
You may be asking yourself whether it is really worth getting a home loan if you have to pay LMI…. I cannot answer that for you unfortunately. All I can advise is to do your research and work out if it is in your best interest.
As with anything in life there are pro’s and con’s in everything, and getting a loan with LMI definitely has both pro’s and cons.
I am more than happy to discuss this further with you if you would like more information, it is just one of those things where every single person’s situation is different and you need information tailored to you.