Investors need to be aware that lender's mortgage insurance (LMI) offers them no protection if they default on the loan, a leading mortgage professional has warned.
“Buyers need to be aware that LMI does not cover them in the event of foreclosure,” founder of Pink Finance Nicole Cannon said.
Lender's mortgage insurance is a premium payable on loans with loan-to-value ratios above 80 per cent.
Ms Cannon said many investors mistakenly believed paying LMI would protect them from liability for the purchase.
However, LMI benefits the lender, not the borrower, Ms Cannon explained.
“In the small chance that a lender has to foreclose on a property and there's a shortfall on the sale of a property, the LMI will cover the bank's loss,” she said.
However, the borrower will then need to pay back this sum to the insurer.
“The mortgage insurer will then come up with an arrangement with the purchaser to pay off that loss,” Ms Cannon said.
Aussie mortgage broker Ross Le Quesne said investors need to understand that LMI is not an exemption from liability for the loan.
“Just because a mortgage insurer pays out to a lender, it offers no protection, so the client is still liable for the debt in the case of a mortgage insurance claim,” Mr Le Quesne said.
On the other hand, Ms Cannon said LMI had multiple advantages, particularly allowing buyers to get into the property market with a smaller deposit.
“It helps you secure a piece of property and you can then, if you purchase in a great area, take on that capital gain,” she said.