The LMI consists of a single down payment, which becomes payable when the borrower has a deposit of less than 20% of the price of the home. The borrower pays the fee to the lender at the time of liquidation, who then pays the insurer and the policy is valid for the life of the mortgage, regardless of its duration. Lenders' mortgage insurance (LMI) premiums are paid in two ways: a down payment or through capitalization. Capitalizing your LMI premium basically means adding it to the total amount of the loan and paying it in regular installments with your home loan.
Borrowers usually pay the LMI up front, and the cost is often part of their loan. The LMI can be paid in advance when you pay off your mortgage loan, or it can be paid monthly as part of your mortgage loan repayments. The LMI is non-refundable, which means that even if you can apply for a 30-year loan and return it after just 10 years, you won't receive any reimbursement in the form of a premium repayment. The lender will pay the LMI premium to the insurer when liquidating the purchase of your home.
This one-time upfront payment covers the lender for the life of the loan (which can be up to 30 years). The amount of the LMI premium depends on the lender, how much it lends to you and the amount of your deposit. The lender will normally transfer the cost of this LMI premium to you in the form of a commission. This is because the cost of buying an LMI is part of the lender's costs in providing financing for loans.
You can pay this cost to the lender at the time of the agreement, or you can include it as part of the loan (so the cost of the LMI will be added to the loan repayments during the term of the loan). Your lender, broker, or financial advisor will be able to provide you with details of the options available to you. LMI is not mortgage protection insurance, which a borrower can take out separately to insure against the risk of not being able to meet their loan payments. The LMI is required when the borrower has a deposit of less than 20% and the loan-to-value ratio (LVR) of the loan is greater than 80%.
This option is available for both owner-occupied and investment properties, on any loan where the LMI applies. The LMI is calculated based on the amount of the loan and will vary depending on the loan-to-value ratio (LVR). Basically, the LMI is a policy or tool that allows the lender to apply for a riskier loan with a smaller deposit and a higher LVR, which ensures that they won't have to pay out of pocket if the house cannot be sold to cover the loan. It's important to understand that the LMI doesn't protect the borrower if they can't afford the mortgage, but it does protect the lender.
This means that if you have problems with your reimbursements, you won't be able to file an LMI policy claim on your behalf. Then, the LMI insurer can come to you, the borrower, and demand that you pay the deficit directly to them and not to the lender. As the housing market is subject to external pressures, at any given time the lender wants to ensure that the loan will be repaid. Not all lenders use both mortgage insurance providers, so depending on the lender you choose, the LMI may be calculated slightly differently.
That said, there are some professions that can be approved for up to 95% of LVR without having to pay any LMI. Wanting not to miss out on the property they decided to buy, Tim and Erica's agent advises them to capitalize on their LMI premium, which means adding the cost to their mortgage loan.