First of all, what is Lenders Mortgage Insurance (LMI)?
LMI is insurance the bank will generally require you to purchase if you need to borrow more than 80% of the value of the property you provide as security.
So now that I have LMI, that means the bank can only take the property I provided as security, right?
Wrong! If you can’t make your repayments, the bank can take possession of the property or force you to sell. If that still doesn’t cover what you owe, the LMI will pay the bank the balance still owing.
But it doesn’t stop there… Unlike in some States in the USA, you can’t just hand back the keys and walk away from the loan. The LMI provider can and generally will come after you for any shortfall, and numerous bankruptcy proceedings have been launched by LMI insurance companies against borrowers over the past decade.
There can certainly be legitimate reasons to borrow a high proportion of the value of the property you give the bank as security, however it does come with additional risks. If rates go up or if your circumstances change, it may be difficult to make your repayments, and it’s possible you could owe (and will need to repay) more than the value of the property.
Make sure you’re clear about what you’re agreeing to, and if in doubt, ask the questions!
Noah Cohen is Mortgage Broker with Origin Finance, and is a Credit Representative (CRN 490277) of BLSSA Pty Ltd (Australian Credit Licence 391237)