If you’re looking to buy a home but don’t have a 20% deposit, you’ll generally need to pay for lenders mortgage insurance (LMI).
It can be a good option for some buyers as it allows them to get into the property market sooner, but it can also increase your interest costs over the life of your loan.
What is LMI?
LMI is insurance that is taken out by your lender to protect them if you default on your loan.
In most cases, you’ll have to pay LMI if you borrow more than 80% of the value of the property.
For example, if you want to purchase a $500,000 property, you’d typically need a 20% deposit of $100,000 to avoid paying LMI.
If you’ve only saved 10% – or $50,000 – a bank might still lend to you if you take out lenders mortgage insurance.
Remember, there are other upfront costs you need to factor in on top of the deposit, such as stamp duty and conveyancing fees.
LMI shouldn’t be confused with Mortgage Protection Insurance:
- LMI protects the lender
- Mortgage Protection Insurance protects the borrower (you) if they can no longer meet their home loan repayments. This is a completely separate insurance product altogether.
When do you pay LMI?
LMI is a one-off payment that can either be rolled into the total cost of your loan or paid upfront upon settlement.
If added onto your mortgage, you’ll have to pay interest on the total loan amount, so it will increase the minimum monthly loan repayments.
How much does LMI cost?
The cost of your LMI premium depends on the amount you borrow and the value of the property, as well as other factors like your employment and the type of loan you get.
Generally, LMI is calculated on a sliding scale, so the more you’re able to contribute to the deposit, the lower your loan-to-value ratio will be, and the less LMI you’ll pay.
The loan-to-value ratio (LVR) is the loan amount divided by the assessed value of the property.
So, let’s say you’ve saved a $50,000 deposit for a home worth $500,000, the LVR would be 90%.
The exact cost of LMI varies from lender to lender, so it’s worth speaking to your Smartline Adviser for more information.
How can you avoid paying LMI?
There are ways to reduce or avoid the LMI premium:
1. Save a larger deposit
You can usually avoid paying LMI if you save up the full 20% deposit, on top of other upfront costs.
Even if you don’t reach the full 20%, the closer you get the lower your loan-to-value ratio will be, and the lower the cost of LMI.
Here are some tips to help reach your savings goals faster.
2. Use a family guarantee
Another option could be to ask a family member to provide a guarantee for your home loan.
In most cases, the guarantor will use their home as additional security for your loan. This guarantee doesn’t cover the entire loan amount, just a portion of it.
For example, if you’ve saved a 10% deposit, a guarantor could use the equity in their home to guarantee another 10%. This will give you the 20% security needed to avoid paying LMI.
However, keep in mind that your guarantor will bear the responsibility of repayments and related costs if you default on your loan. It could also affect their ability to borrow in the future, so they should get professional advice before making a decision.
You can apply for the guarantor to be released from the agreement when you’ve paid off the portion of the loan under guarantee, or when your home increases in value enough for you to take on the loan yourself.
3. Access one of the government’s loan deposit schemes
Eligible first-home buyers and single parents may be able to access the governments First Home Loan Deposit Scheme (FHLDS), New Home Guarantee, or Family Home Guarantee.
The FHLDS and New Home Guarantee allow eligible first-home buyers to purchase a property with a deposit of as little as 5% – plus borrowing costs – without the need to take out lenders mortgage insurance (LMI).
Similar to a family guarantee, the Commonwealth Government guarantees the additional amount needed to reach a 20% deposit.
Alternatively, the Family Home Guarantee, announced in the 2021 federal budget, allows single parents with dependent children to buy a property with a deposit of as little as 2%, subject to their ability to service a loan, with the government acting as a guarantor on the loan.
For example, a single parent hoping to purchase a $460,000 home would typically need to save a 20% deposit of $92,000 to avoid paying LMI.
Under the Family Home Guarantee, they could secure the property with a 2% deposit of $9,200.
There are limited places available, as well as restrictions on income and property value so speak with your Smartline Adviser to find out if you qualify.
4. Waivers for certain professions
Some lenders will waive or lower the LMI premium for certain occupations that are considered to have less of a risk of job loss, such as doctors or dentists.
The list of professionals varies from lender to lender, and not all lenders offer LMI waivers.
Pay LMI or keep saving?
There are arguments for both options:
- Allows you to get into the housing market sooner
- Your deposit can be lower
- Can be a good option if you think property prices will rise
Saving a larger deposit:
- Your mortgage repayments will be lower
- Removes or reduces the cost of LMI
Everyone’s circumstances are unique, so you need to decide what’s is best for you.
Get in touch with your Smartline Adviser to discuss your options.
DISCLAIMER: The information contained in this article is correct at the time of publishing and is subject to change. It is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Smartline recommends that you consider whether it is appropriate for your circumstances. Smartline recommends that you seek independent legal, financial, and taxation advice before acting on any information in this article.