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No matter what you call it, it's not what it sounds like
Lenders Mortgage Insurance, Mortgage Insurance and LMI is all the same thing. When you are arranging a home loan, your lender may ask you to pay this fee which can range from around $220 to more than $10,000. The sky is the limit for Lenders Mortgage Insurance. Contrary to popular belief, although you pay the premium, it offers you no protection. Worse still, even if a claim is never made, Lenders Mortgage Insurance can keep you locked into a poor quality lender for years. So what is it, what's misunderstood and how can you avoid it?
The trick to LMI is understanding which word to emphasise – it’s Lenders Mortgage Insurance. LMI is insurance your Lender takes out to protect them against loss if you default on your loan, and they take possession then sell your property. Some important LMI facts are:
- Contrary to rumour, there are more than two mortgage insurers in Australia.
- Even if your situation and the mortgage insurer are identical, the LMI premium often differs between lenders, just like the same Holden Commodore insured with GIO will have a different premium dependant on the driver.
- Different lenders charge different portions of the premium under different circumstances. Some lenders charge it every time, some at 60%, some at 85% and so on.
- There are several effective strategies available to reduce or avoid LMI altogether.
- If a mortgage insurer meets a claim for a lender, the mortgage insurer is usually entitled at common law to reclaim that money and any associated expense, including interest costs from the defaulting borrower.
If you find the situation confusing, don't worry, you are not alone. Many people become confused about who is covered by Lenders Mortgage Insurance because they are sometimes required to pay for it. Regardless of whether you pay all, some or none of the Mortgage Insurance, it is your lender that is the insured and you have no protection, claim or entitlement to that policy. The terms and the premium you pay for LMI vary wildly between different lenders and different types of mortgages. It is for this reason, mortgage insurance is listed in your loan contracts, but not included in comparison rates, advertising and sometimes mortgage quotes. It is up to your lender whether you pay it, how much you pay and whether you are entitled to a refund or not if you find yourself needing or wanting to refinance.
The LMI golden rule is to choose carefully and avoid paying it if you can. If you would like help on developing a plan to reduce lenders mortgage insurance or avoid it altogether you should ask a Mates Rates mortgage broker for help.
Although most lenders, brokers and borrowers don't, Lenders Mortgage Insurance premiums should be taken into consideration when comparing the cost effectiveness of any loan.
If you would like help avoiding mortgage insurance, keeping LMI costs down or making sure they are included in the costs comparison process when selecting your home loan, talk with a Mates Rates Mortgage Broker. You can arrange a free consultation by clicking here.
If you have already paid lenders mortgage insurance and are concerned about your rights in relation to the mortgage insurer, you can contact the Insurance Council of Australia on (02) 9253 5100.
