Today I am going to write a quick section with the intent of dispelling the fallacy that many people have about lenders mortgage insurance.

You may have heard the term Lenders Mortgage Insurance (LMI) or even paid it yourself when taking out a loan at one stage or another – but do you actually know what it is?

So what is it you ask?

LMI is a form of insurance you pay (a one time fee) to a lender ( in addition to the loan amount you are applying for). Whilst it is not a legal requirement, it is a requirement of most lenders if you are borrowing greater than 80% of the value of your residential property. The price is generally higher the higher your Loan to Value (LVR) is.

So who does it insure?

LMI insures the lender. One common misconception is that it covers ’you’ the borrower in case you default, which is untrue. It is actually a form of insurance for the “lender” to cover the higher risk of lending you are requesting. Essentially it is the lender charging you a premium for them to minimise their exposure to lending at such leverage.

Whilst this may sound like a bad thing – for the most part it isn’t. LMI can allow you to buy that property you were after sooner, and with less of a deposit than you thought possible. Yes it can cost a bit more upfront (unless you capitalise the LMI onto the loan) – but it is a fact of lending in todays market, and you just have to realize the additional costs if you are looking to borrow over 80% from one of Australia’s lenders.