What to Know About LMI

For large portion of people looking to buy a home, obtaining a mortgage loan is an essential part of the process. It may come to a surprise to some that in addition to making mortgage payments, it may be necessary to pay a lender an additional monthly fee. LMI is an obligation for many homeowners and one may need to account for this additional expense when becoming a homeowner. Approved home mortgage applicants making a small down payment need to know more about LMI and how it will affect them.

What Is LMI?

LMI, or "lenders mortgage insurance", is a style of insurance offered to mortgage lenders in order to secure the home loan from default. This insurance is paid out to the trustee or lender and in some instances is required upon being approved for a mortgage loan. Homeowners may expect to pay an average of $55 monthly for every $100,000 part of a mortgage loan. Rates may be higher.

It has become standard for lending institutions to require LMI when an approved applicant is not able to make a large down payment. When LTV exceeds 80 percent, a lender will require LMI. These requirements come down through The Bank Act. Premium rates may range between 1 per cent and 2.75 per cent of the principal of a loan, depending on the LTV.

What Do Lenders Ideally Want from Homebuyers?

In Canada, lenders once desired a down payment of 25 per cent. This requirement has decreased to 20 per cent, however, it may still be challenging for prospective buyers to come up with the ideal amount to receive the best rates from lenders and create sufficient equity in a home. In order to protect lenders, LMI is required for those mortgage loans where buyers make relatively small down payments.

Why Is LMI Good for Homebuyers?

A chief financial officer of CMHC shared that mortgage insurance makes it easier for all Canadians to purchase a home while taking advantage of the same interest rates given to those making higher down payments. Such individuals will be taking out a CMHC mortgage or high ratio mortgage.

How Does LMI Benefit Lenders?

Lenders want assurance that an applicant will not walk away and default on a loan. LMI is a safeguard for lenders. These payments go directly to the lending institution. The payments do not serve to build home equity. In addition to regular payments, the costs of insurance premiums are also paid by approved applicants. This premium may be rolled into monthly payments. Otherwise, a borrower may make a lump sum payment.

Does Credit Score Matter?

Unlike their American counterparts, Canadians do not receive lower rates due to high credit scores. The same premium is paid by all. Making a significant down payment is the only way to avoid paying LMI on a Canadian home mortgage loan.

Understand More About LMI

Approved Canadian applicants can purchase a home with a mere 5 per cent down payment. The process to determine LMI costs include the total down payment amount and the mortgage type. Other companies aside from CMHC offer mortgage loans. Bow Meadows homeowners who need a home mortgage can turn to Canada Guaranty, Genworth and CMHC. Speak to a lender to learn more about LMI and to understand how much payment amounts may be on a specific mortgage loan amount.