Understanding lenders mortgage insurance

Understanding how lenders mortgage insurance works is important for borrowers of all stripes, whether for traditional home loans or low doc home loans.

Whether in the market for traditional home loans or low doc home loans, one matter you’ll need to understand concerns insurance – specifically, lenders mortgage insurance (LMI).

What is LMI?

LMI is a policy  protecting mortgage lenders in the event that a borrower defaults on their home loan repayments. Anytime a lender makes money available, there is a risk the borrower may not be able to pay it back. This can happen due to financial circumstances, a death or any other reason that might lead a borrower to renege on their repayment obligations.

This risk grows depending on how much money the lender is making available when compared to how much money of their own the borrower is putting up.

It’s for this reason many lenders require a borrower to put down at least 20 per cent in the form of a deposit. Not only does this reduce the amount of money a borrower will have to pay back, it acts as a good faith example that the borrower can come up with the necessary funds.

However, if a borrower is unable to put down this deposit, they will likely be required to take out an LMI policy before a lender will make a loan available. This way if the borrower defaults, not only can the lender receive any profits from the home being sold, they can count on any outstanding loan balance being paid by the insurance provider.

While a loan to value (LVR) ratio of 80 per cent is typically the limit, there are other options available to some borrowers. For instance, Redrock provides low doc loans with LVRs of up to 85 per cent without LMI for borrowers who meet certain qualifications. If you’re in the market for a low doc home loan, contact the specialists at Redrock.