Mortgage Insurance – What Is It?

What is it?
Lenders mortgage insurance only protects the lender and not the borrower. In the event the borrower defaults on their mortgage repayments and the lender has to sell the property, mortgage insurance will cover the deficit between the sale price and the loan amount.

I get many questions from clients asking about lenders mortgage insurance (LMI) and I would like to clarify what it is and how it differs from lender to lender.

When Is Mortgage Insurance Paid?
Mortgage insurance is paid when a person borrows more than 80% of the properties value and they can fully declare their income. This means proving employment with evidence of latest pay slips and tax returns. Self employed persons will need to show a minimum of two years personal and company tax returns.

If applying for a low doc loan, where a person self declares their income without providing fincial evidence, then mortgage insurance kicks in between 60% and 80% of the properties value.

How Much Does it Cost?
Mortgage insurance is a one time only payment and is usually added to the loan. The cost of mortgage insurance becomes more expensive  as the borrowed amount against the properties value increases as well as the actual loan amount.

For example, assuming a property is worth $400,000 and Borrower A lends $340,000 (85% of the properties value) then they would pay significantly less than Borrower B if they borrow $380,000 or 95% of the properties value.

Also, if two borrowers were to lend 90% of a properties value and Borrower A’s property is worth $300,000 and Borrower B’s property is worth $500,000 then Borrower A will pay significantly less than Borrower B

Also, mortgage insurance can vary significantly from lender to lender. In some cases by as much as $5,000 . Ultimately, this may be the difference between choosing one lender over another.

To assess how much mortgage insurance you will pay from each lender it is advisable to get a quote from an experienced mortgage consultant who can quickly calculate the cost difference or you can simply contact us.