When you need to borrow 80% of value of property then in that you require Lenders Mortgage Insurance (LMI) as a condition of contract. That means you own a home with saving less than 20% of purchase price of property. LMI protects lender if you default in home loan by covering your mortgage. LMI protects the Lender if they do not recover remaining balance loan in case of default or sale of property.
When LMI needs to be paid?
When your deposit is less than 20% of purchase price of property then you have to pay LMI. Insurance premium is either paid lump sum or added to your regular repayments and repaid.
Who is going to be Insured from LMI?
The lender is insured by LMI, if you default on loan or mortgage repayments, insurer will recover from your deposit or from guarantor.
If you have small deposit than also you can take loan if you are taking LMI. With LMI you can access larger Home Loan amount or less interest rates.
Calculation of LMI
Calculation of LMI is done as percentage of loan amount and depend on amount borrowed and loan to value ratio. To identify LMI to be paid or not you should have Loan to Value ratio 0.8 or less. Loan to value ration can be calculated as below Loan Amount – deposit amount = Loan to Value Ratio (LVR)