What's the deal with Lenders Mortgage Insurance?

Home loan borrowers are being slammed for an insurance on their mortgage that they may not even fully comprehend, according to the Motely Fool Australia.

Lenders Mortgage Insurance (LMI) is often poorly understood by mortgage borrowers yet is compulsory for borrowers with less than 20 percent equity in their home, almost 25 percent of all home buyers. Many borrowers may not even realise that they are paying for an insurance to protect the lender against default, not the home owner.

The insurance provider is chosen by the lender and even if borrowers were given the option they would be limited to two main providers in Australia, Genworth and QBE Insurance. QBE lenders mortgage insurance premiums have reportedly risen by 17 percent since 2012. According to mortgage broker Home Loan Experts LMI for a typical $500,000 property for a borrower with 10 percent deposit has risen from around $6000 up to almost $9000.

While the insurance is enforced on those who can least afford it, it also puts a major barrier in front of those looking to switch to a cheaper home loan provider as it is not portable with the loan and borrowers looking to switch to a home loan with a better interest rate would be required to pay the LMI over again.

While homeowners do not yet have any choice for switching their LMI, those who are in a position to switch and save on their mortgage can compare home loans for a better deal on Mozo.

Have a question about lenders Mortgage Insurance? Ask the gurus on Mozo Answers.