Mortgage Indemnity Insurance

Mortgage Indemnity Insurance, also known as Mortgage Indemnity Guarantee (MIG) or Lender’s Mortgage Insurance (LMI), is a type of insurance that protects the lender if a borrower defaults on their mortgage. This insurance is typically required for high loan-to-value (LTV) mortgages, where the borrower has a smaller down payment. Here’s what you need to know about this important aspect of mortgage financing:

What is Mortgage Indemnity Insurance?

• Purpose: Protects the lender against loss if the borrower defaults and the property is sold for less than the outstanding mortgage balance
• When required: Typically for mortgages with a loan-to-value ratio above 80% (less than 20% down payment)
• Who pays: The borrower pays the premium, even though the insurance benefits the lender
• Coverage period: Usually remains in effect until the loan-to-value ratio drops below 80% through principal repayment or property appreciation
• Not to be confused with: Mortgage life insurance or mortgage payment protection insurance, which benefit the borrower

How Mortgage Indemnity Insurance Works

• Risk assessment: The lender evaluates the loan’s risk based on the down payment size, credit score, and other factors
• Premium calculation: The insurance premium is calculated as a percentage of the loan amount
• Payment options: The premium can be paid upfront at closing or financed into the mortgage
• Claims process: If the borrower defaults and the property sale doesn’t cover the outstanding loan, the insurer pays the lender the shortfall
• Borrower liability: In some jurisdictions, the insurer may still pursue the borrower for the shortfall amount after paying the lender

Cost Considerations

• Premium factors: The cost varies based on loan amount, down payment percentage, credit score, and property type
• Typical range: Premiums generally range from 0.5% to 5% of the loan amount
• One-time vs. ongoing: May be a one-time upfront premium or an ongoing monthly payment
• Tax deductibility: In some regions, the premium may be tax-deductible (consult a tax professional)
• Impact on affordability: The additional cost affects the overall expense of the mortgage and should be factored into budgeting

Strategies to Avoid or Minimize Mortgage Indemnity Insurance

• Save for a larger down payment: Aim for at least 20% to avoid the insurance requirement
• Consider a piggyback loan: Take out a second mortgage to reach 20% equity (e.g., 80-10-10 structure)
• Explore government-backed loans: Some programs offer lower insurance costs than private mortgage insurance
• Negotiate with the lender: Some lenders may waive the requirement for highly qualified borrowers
• Request cancellation: Once you reach 20% equity through payments or appreciation, request to have the insurance removed

Mortgage Indemnity Insurance vs. Private Mortgage Insurance (PMI)

• Terminology: Mortgage Indemnity Insurance is more commonly used in the UK, Australia, and other countries, while PMI is the term used in the US
• Function: Both serve the same basic purpose of protecting the lender against default
• Regulation: PMI in the US is subject to specific regulations regarding disclosure and cancellation
• Cancellation rules: In the US, the Homeowners Protection Act requires automatic termination of PMI when the loan balance reaches 78% of the original value
• Tax treatment: Tax deductibility varies by country and changes with tax law updates

Important Considerations for Borrowers

• Total cost impact: Calculate how much the insurance adds to your total mortgage cost over time
• Cancellation criteria: Understand the specific requirements for removing the insurance once you’ve built sufficient equity
• Property valuation: Know how and when you can request a new property valuation to demonstrate increased equity
• Refinancing option: Consider refinancing if property values increase significantly and you can eliminate the insurance
• Disclosure requirements: Ensure the lender provides clear information about the insurance terms and costs

While Mortgage Indemnity Insurance adds to the cost of homeownership, it enables many buyers to purchase homes with smaller down payments than would otherwise be possible. By understanding how this insurance works and planning strategically, you can manage its impact on your finances and potentially eliminate it earlier in your mortgage term.