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.