What is lenders’ mortgage insurance (LMI)?

LMI is an insurance policy that some home loan borrowers need to pay for. The purpose of LMI is to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.

If the borrower defaults on their loan and the sale of the property doesn’t equal the unpaid value of the mortgage, lenders can claim on the LMI policy to make up the difference.

Many people believe that LMI is designed to protect the borrower in the case of loan default, but this is actually mortgage protection insurance, which is a different product. The true purpose of LMI is to protect the lender by reducing the risk to the lender. LMI can allow banks and other financial institutions to lend larger amounts and approve more home loan applications.

If your lender requires you to take out LMI, it can typically be paid upfront or capitalised into (added to) your home loan. If the LMI amount is capitalised into your loan, you would generally be charged interest on it by your lender, along with the rest of your loan. LMI premiums are typically non-refundable which means if you switch your loan to another provider in the future, you generally won’t be able to transfer your LMI to another lender. Depending on the situation, you may have to pay for a new policy through the new lender.