Home Loans 101

Lenders Mortgage Insurance (LMI) covers the lender or bank, in the event of the borrower defaulting on their loan. If the property is subsequently sold, and the amount from the sale is insufficient to pay off the loan in full, this insurance will cover the lender for the shortfall. An exteral company usually provides the insurance to the lender, but some large lenders have in-house mortgage insurance.

As a rule of thumb, this insurance is required if you are borrowing 80% or more of the valuation of the property. This is usually a percentage of the loan amount from 0.6% to 3%+, depending on the percentage of the property being borrowed. So the LMI will be closer to 3% when you borrow 95% of the house value and will be closer to 0.6% when you borrow 82% of the house value. So the more savings you bring to the transaction, the less LMI you will pay. The good thing about LMI is that this cost is added on top of your base loan - so you don't need to come up with extra funds.