LMI protects the lender in case you fall behind with your loan and they have to take possession of the property and sell it to recover their debt. If there is a shortfall the Lenders Mortgage Insurer reimburses them so the loan can be closed – then asks you to make an arrangement to repay the amount outstanding.
There are very few options for borrowing more than 80% without this insurance. (Some ‘non-conforming’ lenders don’t require LMI but their interest rates and fees are usually higher.)
Premiums are once only – paid at settlement – and vary according to the loan size and percentage borrowed. For a standard home loan at 90% of property value the premium is about 1.45% of the loan size, or about $2900 on $200000. The maximum amount also depends on the loan size and value of the property. Whilst the maximum percentage that can be borrowed against an owner occupied home is usually 95%, this can drop to 90% or even 85% as the loan size increases (usually from about $500 000 and $750 000 respectively). Most lenders will allow the LMI premium to be added to the loan amount (capitalised) but this also means you will then pay interest on this amount as well.
The Lenders Mortgage Insurer will usually require you to have a stable employment history and be able to provide proof of 3 or 6 months savings history. This means you need to show that you have made regular contributions to savings (or held your savings for at least 3/6 months) and you haven’t sold an asset to raise the funds for the deposit. Proof required is a copy of a bank statement that has been mailed to you plus an internet transaction listing or interim statement to show the current balance. An exception to this rule is if you have sold another property or shares to raise the deposit. If shares have been used, you should be able to provide CHESS statements or statements from your broker to show your holdings have been stable or growing over the past 6 months. If property is being sold, you should provide a copy of the contract of sale and, if applicable, a copy of your most recent home loan statement to confirm equity in the property.Remember: