Almost half of prospective homebuyers are unsure how lenders’ mortgage insurance (LMI) works.

Less than one-third can correctly describe LMI as cover that protects lenders against the risk of default by borrowers, and 8.2% believe it protects borrowers, a Mortgage Choice survey says.

CEO Susan Mitchell says homebuyers should familiarise themselves with the product, which is usually required by loan providers when borrowers have less than a 20% deposit.

“As property prices continue to relax, there has never been a better time for first homebuyers to purchase,” Ms Mitchell said. “Therefore, it’s essential they have a clear understanding of LMI so they know how it affects their ability to get into the market.”

The survey of 1013 respondents is part of Mortgage Choice’s annual Evolving Great Australian Dream white paper, conducted in collaboration with CoreData.