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What Is LMI (Lender’s Mortgage Insurance) In Australia

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Lender’s Mortgage Insurance (LMI) is a type of insurance that is used to protect financial institutions and lenders against financial loss when a borrower defaults on a loan and can not pay it back. LMI covers the Lender/Bank against the shortfall that may arise if the following sale of the security property does not cover the loan amount.

The insurance premium is paid by the borrower and can either be paid upfront or capitalised into the loan. The two leading LMI providers are Genworth and QBE. The LMI premium can vary depending upon individual borrower profiles.

Traditionally most lenders require the borrower to contribute at least a 20% deposit, hence an LVR of 80%. However using LMI, the lenders are able to offer loans with a lower deposit. In some cases as low as 5% deposit.

The premium for LMI is payable only once at the commencement of the loan and protects the bank/lender for the entire life of the loan.

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1 Comment

  1. James

    It’s a funny ‘insurance’ product isn’t it? I can’t think of any other commercial insurance where the insurer assumes the right to recover damages from a third party in the event the insurance is exercised. E.g. if I insure my factory and someone burns it down, my insurer doesn’t get to try and recover the payout from the arsonist.

    Really, LMI is a call on a debt recovery agent, not insurance at all. The bank pays a premium today and in return gets an exercisable right to transfer a liability to the LMI company at a pre-agreed value. The LMI then tries to recover the debt.

    Seems to me LMIs should be regulated like debt recovery agencies. Also seems to me like the premium for such a product would be much smaller in a competitive banking/LMI market, given the LMI gets both a premium and a chance of recovery and the banks should be competing to lower the cost of LMI.

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