Lenders Mortgage Insurance protects a lender against potential loss in the event of a default on the loan and subsequent mortgagee sale.
LMI is arranged by the lender, not the borrower, however the
borrower pays for it.
It can sometimes be included in the loaned amount, although
for high LVR applications, it is now less commonly allowed to be capitalized,
as many lenders have clamped down on this practice.
If a borrower is unable to continue to make loan repayments,
the property will need to be sold.
If the realized price is less than the loan amount still
outstanding, the difference will be paid by the mortgage insurer.
In the case of an ultimate loss or shortfall, an insurer may
take action against the borrower to cover the shortfall.
Most lenders mortgage insure their loans over an LVR of 80%
but some use a lower LVR depending on the nature of the property and the
With low doc loans, paying LMI on an LVR of 60% is common
with some lenders, particularly with many lenders only lending to a maximum of
60% to lo doc borrowers.
Some lenders insure all of their loans, generally as a
requirement for securitisation.
However it is more typical for lenders to insure loans
approved primarily for the purchase, construction or re-financing of
residential real estate, including vacant land.
The loan purpose may also include home-related items, ie
renovations, furnishings and other personal loan/investment expenditure.
If an LMI provider assesses the application and then
declines to issue the insurance for an approved loan, the lender is likely to
rescind its approval.
The following loan purposes are excluded by Mortgage
· Loans to raise working capital
· Loans to pay tax liabilities
· Construction loans for owner builders
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Tuesday, 3 March 2020