What in the World is LMI?

2010 April 15

Acronyms are very confusing, especially if it is the first time you have ever heard of it.  This is the case with the acronym LMI.  For those in the home loan industry in Australia LMI means Lenders Mortgage Insurance.  If you have never tried getting a loan or purchasing a home your initial reaction would usually be “So what?” It still is a meaningless set of three words.  However, to the home loan industry LMI is very important.  It is both important to the lender and the borrower.

Why would it be important to the lender?  Well it is important to the lender because it protects the lender from failure in repayments.  Hence, the term insurance in the acronym LMI.  It basically ensures payment of the loan.  A concrete example would be if someone takes a loan, and the lender requires LMI.  Then the insurance is paid for by integrating it into the repayments, or by paying a lump sum at the beginning of the loan before making any repayments.  If for any reason at all, the borrower is unable to make repayments, then the property will be sold at auction.  Where the sale cannot cover the entirety of the losses of the lender, the difference is made up for by the insurance company.

On the other hand, it is important to the borrower because it enable the borrower to get into the real estate market much earlier.  Banks and lenders often require at least a 20% deposit before a loan can be approved.  The amount of 20% of the total property value is a lot of money, and may take some time to save for.  However, with the use of LMI it is possible to make a loan without any deposit.

What if you cannot make the 20% deposit or pay the amount of insurance premiums required?  There is still a way to get your loan approved.  This is by taking out a mortgage on another property.  Once another property is mortgaged then the banks have less exposure resulting in less risk.  Because there is less risk to them, then banks and lenders would gladly grant your loan even without a 20% deposit or LMI.

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