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What's the difference between lenders' mortgage insurance and home loan protection insurance?

What's the difference between lenders' mortgage insurance and home loan protection insurance?

We explain the meaning of and difference between LMI and HLP, and why you might need both of them when you buy a property.

If you recently took out a home loan and your deposit was smaller than 20%, you probably had to pay lenders’ mortgage insurance.

Lenders’ mortgage insurance (LMI) can be paid as a lump sum upfront, like stamp duty, or it can be capitalised (incorporated) into your home loan. If you do capitalise it into your loan, you’ll end up paying this back over the life of the loan, plus interest. The cost can be quite sizeable.

So, what exactly is LMI and why would you need to pay it?

Put simply, lenders’ mortgage insurance protects your lender if you default on your home loan repayments. If, for example, you’re unable able to pay your home loan and your home is repossessed, LMI pays the lender any gap between what the property could be sold for and the amount still owing on the home loan.

The benefit of LMI is that it enables the lender to provide you with the home loan you need, even with a smaller deposit. Some people prefer this option, rather than waiting until they can save a larger deposit (i.e. typically 20% or more of the purchase price).   

So if lenders’ mortgage insurance protects the lender, what protects you and your family if you unexpectedly find you can’t make your home loan repayments?

Being made redundant or falling ill, for example, could see you out of work and could affect your income and ability to repay your home loan.

CommInsure’s home loan protection insurance can help cover your Commonwealth Bank home loan repayments for up to a year if you become sick or involuntarily unemployed.

It can pay a lump sum (up to $75,000) off your loan if you suffer a defined medical trauma, and help repay your outstanding loan balance if you pass away, up to your sum insured to the maximum of $750,000.

Trauma cover conditions are:

  • Cancer
  • Coronary artery disease requiring bypass surgery
  • Heart attack
  • Stroke

Trauma conditions have specific meanings and a benefit is only payable if you meet the precise meaning of the definition set out in the Home Loan Protection Product Disclosure Statement and the Loan Protection Medical Definitions Reference Guide.

This article is intended to provide general information of an educational nature only. It does not have regard to the financial situation or needs of any reader and must not be relied upon as financial product advice. You should consider seeking independent financial advice before making any decision based on this information. Loan Protection is issued by The Colonial Mutual Life Assurance Society Limited ABN 12 004 021 809 AFSL 235035 (CMLA) and is a wholly owned but non-guaranteed subsidiary of the Commonwealth Bank of Australia ABN 48 123 123 124. CommInsure is a registered business name of CMLA. A Home Loan Protection Product Disclosure Statement (PDS) is available online, from any Commonwealth Bank branch or by calling 13 3982 and should be considered in making any decision about Loan Protection.