Buying a home is one of the most significant financial commitments many Australians will make. If you’re looking to secure a home loan but have a deposit of less than 20% of the property’s value, you may encounter Lenders Mortgage Insurance (LMI). Understanding what LMI is, its benefits, and ways to avoid it can help you make informed financial decisions.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a one-off fee that lenders charge borrowers who take out a home loan with a deposit of less than 20%. LMI protects the lender (not the borrower) if the borrower defaults on their loan. If the property is sold at a loss, the insurance covers the lender’s shortfall.
LMI is typically added to the loan amount and incorporated into monthly mortgage repayments.
Benefits of LMI
Although LMI is an additional cost, it does offer some benefits:
- Easier Homeownership Access – LMI enables buyers to enter the property market sooner without waiting until they save a full 20% deposit.
- Potential for Property Growth – By purchasing a property sooner, borrowers may benefit from potential capital growth instead of delaying their purchase to save a larger deposit. Payback on LMI can be as little as a few months in a hot property market.
- More Loan Options – Some lenders offer flexible lending criteria if LMI is in place, meaning borrowers with smaller deposits or unconventional income sources may still qualify for a mortgage.
How much does LMI cost?
The amount of LMI paid depends primarily on the loan amount and the Loan-to-Value Ratio (LVR), which is the percentage of the loan amount relative to the property value. The lower your deposit funds, the higher your LVR and the higher the risk to the lender.
For example, for a first home buyer taking out a $580,000 loan on a $650,000 property, LMI can range from $10,000 to over $20,000, depending on the lender. The amount of LMI a lender charges can be as important a factor as the interest rate when determining the right lender for you.
How to Avoid LMI
While LMI can be helpful, many borrowers prefer to avoid this additional cost. Here are some strategies to do so:
- Save a 20% Deposit – The most straightforward way to avoid LMI is to save a deposit of at least 20% of the property’s value.
- Use a Guarantor Loan—Some lenders offer family guarantor loans, in which a family member uses their property as security to help you avoid LMI.
- First Home Buyer Schemes—The Australian government offers initiatives like the First Home Buyers Guarantee (FHBG), which allows eligible buyers to purchase a home with a 5% deposit without paying LMI or as little as 2% for a single-parent family.
- Lender-Specific Offers – Some lenders waive LMI for professionals in specific fields, such as doctors, lawyers, and accountants, due to their high earning potential. A few lenders will also waive LMI below 85% LVR.
- Deposit Loan—With a deposit as little as 2.2%, a deposit loan in conjunction with a standard home loan can save thousands for those with a strong income and minimal available deposit funds. This can be an excellent solution for those with money tied up in business or other investments.
Other considerations
Your financial situation is unique and it is essential that you obtain guidance specific to your circumstances. Some other checks that you should do in conjunction with your broker:
- Check if you qualify for an LMI waiver. These are primarily available for high-earning professions; however, some lenders have niche offerings for other careers, including teachers, nurses, vets, engineers, and IT professionals, into which you may fit.
- Can you access a prime interest rate – Interest rates are generally higher the higher your LVR, but this is not true for all lenders. Solutions such as a guarantor loan or the government’s First Home Buyer schemes may allow you to access a prime interest rate and avoid LMI.
- Know the full cost of the property purchase – whilst a healthy deposit is required to avoid LMI, you must ensure funds are available for stamp duty and the other costs associated with a property purchase. For first home buyers there are a number of schemes to avoid this, but these differ by state, and it is best to get advice from your broker or conveyancer to understand the costs and benefits.
- What support will you obtain from your broker after the loan is in place – at Captiva Finance, we conduct annual reviews with all clients to ensure that as your equity in the property increases, that benefit is passed on to you as an interest rate reduction.
Final Thoughts
Lenders Mortgage Insurance can be a useful tool for getting into the property market sooner, but it’s important to understand the costs and potential alternatives. By considering different strategies to avoid LMI, you can save thousands and improve your financial position when buying a home.