What is mortgage insurance?

Mortgage insurance refers to insurance that is taken out to protect the parties involved in a mortgage agreement.

There are two main types of mortgage insurance:

Lenders Mortgage Insurance (LMI) - which protects the lender against the borrower defaulting on their mortgage payments

Mortgage Protection Insurance - which protects the borrower, in the event that they cannot make their mortgage repayments.

Lenders Mortgage Insurance

In the past, getting a home loan from a bank was even more difficult than it is today. Banks would only lend to borrowers who had saved up a deposit of at least 20% as this was seen as a safe limit to protect the bank if the borrower defaulted on the loan.

Having this limit in place meant that many average Australian families could not afford to own their own home, as a 20% deposit was well beyond their reach. This caused the insurance companies to rethink their policy and come up with a new type of insurance known as Lenders Mortgage Insurance (LMI). Not only did this benefit lenders by protecting them against payment default, it also benefited borrowers because lending restrictions were eased as a result.

Tags: home loan answers