What is Lenders Mortgage Insurance?
LMI is a insurance contract where the borrower pays the premium to protect the lender in event that the borrower default on the mortgage payments.
Who does the insurance contract protect?
It is important for everyone to understand the protection insurance the borrow pays actually protects the lender. In event where the borrow is unable to keep up the mortgage payments, the banks will call in the loan and usually sells off the collateral on the loan. The insurer will pay the shortfall to the bank.
However if someone does not have the insurance, the bank will come after you for the shortfall. From this perspective, it can be seen that borrower will also benefit but only if they fails to make future payments.
How Much is it?
All lenders use their own calculators in establishing the LMI cost and the premium borrow pays. The only factor among the banks s that the higher the loan to value ratio, the higher premium. For savvy investors, it best LVR would be when rate of increase in premium outpaces the rate increase in LVR or essentially the second derivative of the premium and LVR relationship.
Is LMI tax deductible?
Lenders Mortgage Insurance is only deductible as a borrowing cost if the insurance premium paid relates to a loan for investment property. Costs can be deducted over 5 years or the life of the loan. If the premium is capitalized, it can still be deducted.
The deduction is only allowed for portion of the year when it is incurred. Stamp duty is also payable on LMI as is GST and it would be the full premium charged that is deductible.
Where can I get the insurance?
Genworth (GMA ASX) and QBE (QBE ASX) holds the largest market share in mortgage insurance in Australia. The lender usually have a pre existing relationship with its own LMI underwriter. Either it is an in house process or they outsource to a third party. Unlike underlying loans, usually there is no pre approval.