With property prices back on the way up and interest rates fluctuating, if you’re in the market for a new home, avoiding potential additional costs, fees and taxes is going to be high on the priority list. Understanding all the terminology is a good starting point and if you’re struggling to save a deposit, this is a term you are definitely going to want to understand: LMI. What is it and how do you avoid paying it?
What is LMI?
LMI stands for Lenders Mortgage Insurance and is a type of insurance that protects the lender (not the borrower) in the event that you default on your mortgage payments. It is usually triggered when the loan required is considered a higher risk by the lender and more specifically when the loan you apply for is for more than 80% of the property’s value.
It is typically paid as a one-off payment by the borrower at the time of settlement or it can be capitalised on your loan. This means that the fee is added to your loan and you pay it back with your mortgage repayments. You do not need to arrange LMI yourself - the lender will arrange this for you.
Lender’s Mortgage Insurance is not to be confused with Mortgage Protection Insurance. Mortgage protection is an insurance designed to protect you, the borrower, and covers mortgage repayment should the event of unforeseen events such as injury, illness or unemployment.
How is LMI Calculated?
When you apply for a mortgage, lenders will want to know what your Loan To Value Ratio (LVR) is. Your LVR shows what proportion of the value of the property a buyer needs to borrow. It indicates the value of your home loan as a percentage of the total property value as determined by the lender.
For example if the property you’re looking to buy has been valued at $700,000 and you have a deposit of $100,000 available, you effectively need to borrow $600,000. Your LVR would be: $600,000 / $700,000 x 100 = 86%
When your LVR is greater than 80% you will generally be liable to pay Lenders Mortgage Insurance (LMI) as you are perceived to be a greater risk for lenders.
How Much Is LMI?
There are a few factors that determine how much LMI would be. These include the size of the mortgage, the deposit amount you have available, whether the property you are buying is to live in or rent out and the lender’s insurer.
Some other factors that may be taken into consideration include your employment stability (whether you work full time, part time or you’re self employed), whether you have genuine savings and whether you are applying for a loan under the Home Guarantee Scheme (which will grant you an exemption from LMI).
Broadly speaking, the smaller your deposit, the more you’re likely to pay in Lenders Mortgage Insurance.
How to Avoid LMI
The good news is that there are a number of ways in which you can avoid LMI. The most obvious one is of course, to wait until you have a 20% deposit available for the range of property value that you’re looking to buy. However, there are a few more scenarios that may enable you to avoid paying LMI.
Eligibility For A Professional Home Loan
Specialist home finance borrowing arrangements exist for professionals and specialists such as medical professionals, nurses, lawyers, accountants and engineers.
Lenders perceive these professionals as lower risk as they tend to be in the higher income brackets. In the majority of cases, people working in these professions can avoid paying LMI so long as their LVR does not exceed 90%. The discounts and terms vary by lender so it’s worth getting a mortgage broker involved to shop around for the right loan for your circumstances and to determine their eligibility for these specialist borrowing arrangements.
Consider A Family Guarantee
If you don’t have a 20% deposit and want to avoid paying LMI another option is to consider a family guarantee loan. A guarantor is someone, usually a family member, who uses the equity in their own home to secure your mortgage. The equity would need to cover the 20% deposit to avoid lenders mortgage insurance.
Essentially if you’re unable to make your loan repayments the responsibility would fall onto the shoulders of the guarantor so this option comes with considerable risk for the guarantor and strict conditions.
Look At Government Schemes
If you’re struggling to save a big enough deposit it’s also worth checking to see if you’re eligible for a government scheme, particularly if you’re a first time buyer looking for a home loan.
There are different schemes available depending on the state or territory that you live in but the First Home Guarantee Scheme is backed by the Federal Government and aims to assist first home buyers secure a property with as little as a 5% deposit. The National Housing Finance and Investment Corporation guarantees the lender up to 15% of the purchase price of the home.
Applicants must have between 5% and 20% of the required deposit saved and not have previously purchased a property.
The Federal Government's Help To Buy Scheme is also due to launch in 2024 so it's worth keeping up to date with all the options available to you. We will aim to keep you updated on all the latest schemes and opportunities as we get new information.
Compare Different Lenders
This is where the benefits of working with a mortgage broker can really pay dividends. We can help you to shop around and potentially avoid LMI, for example if your deposit is just under the 20% threshold. Not all lenders require mortgage applicants to pay LMI if they’re borrowing more than 80% of the value of the property so it pays to have someone to help you explore the options as it could help you to save thousands of dollars.
Make sure you also check out our last blog on the Stamp Duty Concession in Qld and how to avoid paying it.
The information in this article is general in nature and doesn’t take into account your personal circumstances or financial situation. If you are looking for a home loan home, an experienced home loan experts from CJG Finance can help you navigate the process.
To find out more, contact us or call Colin at CJG Finance on: 0402 413 917 or email him: cgreen@cjgfinance.com.au