August 08, 2023 by Mortgage Choice Boronia
If you're looking at buying a property, especially for the first time, you might have come across the term 'Lenders Mortgage Insurance' or LMI. About 20% of borrowers in Australia have had to pay LMI, but many don't understand exactly what it's for.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance, or LMI, is a one-off insurance fee paid by you to the lender. It is designed to protect the lender (not you) in case you can't repay your home loan. It is paid by the borrower at the time of settlement and can be quite a substantial fee to pay - especially on your first home!
When you're buying a residential property, you are usually asked to pay LMI by the lender if you have a loan-to-value ratio (or LVR) of over 80%. This means that you haven't saved a deposit of 20% of the property price, and the lender deems you a higher risk than those who have.
With property prices sitting at exceptionally higher levels in capital cities around Australia, LMI payments have become increasingly common. If you want to save on the thousands of dollars of LMI, you can usually avoid it by saving more deposit.
Lenders Mortgage Insurance should not be confused with Mortgage Protection Insurance, which is designed to cover the borrower should any unforeseen circumstances arise which make it hard for you to make repayments (loss of employment, injury, illness or death).
"While Mortgage Protection Insurance is a great idea for anyone entering into a home loan, it's wise to remember that it's completely different to Lenders Mortgage Insurance. LMI protects the lender and not you."
How much is LMI?
The cost of LMI will depend on the lender, the property & the size of your deposit, as well as a few other factors. The lender will organise LMI for you, as each lender will have their own policy & guidelines. The LMI fee is usually included in the total cost of the home loan which means that interest will be charged on the home loan plus the LMI fee which will increase your minimum monthly repayment amount.
The main factor affecting the cost of LMI is the percentage of the total property value you are trying to borrow, and whether or not your deposit is made up of genuine savings (you have saved over time) or a monetary gift (from your parents for example). Should the majority of your deposit be genuine savings, it indicates to the lender that you are able to save and repay a loan.
Is there a benefit to LMI for me?
Unfortunately, LMI is a necessary evil when you're purchasing property. If you have less than a 20% deposit, you won't be able to secure the funds from the lender unless you pay the LMI required. Basically, it's a safety net for the lender in the event a forced sale price doesn't cover the full cost of the debt. They won't lend to you without it!
While it sounds annoying to have to pay an additional fee on top of your total home loan, LMI actually means that lenders are in fact, able to lend to people with less than 20% deposit. It means that hundreds of thousands of Aussies have been able to get into a new home faster and start building equity for themselves.
How can I avoid paying LMI?
While LMI isn't necessarily a bad thing, there are a few ways that you can avoid paying LMI. Here are a few strategies to keep that money in your pocket, instead of paying the bank:
- First Home Guarantee Scheme: The FHGS is a Government initiative to make buying a first home cheaper and faster. Basically, if you have less than a 20% deposit and are eligible for the scheme, the Government will 'guarantee' the rest. You could buy with just a 5% deposit and avoid paying LMI, because the lender has the Government as your guarantor. Read about the first home guarantee here.
- Get a family guarantor: This is when a family member - usually a parent - will 'guarantee' your loan using their own property. This means that you avoid LMI and can buy with a smaller deposit. However, your guarantor will carry the responsibility for the loan should you default on repayments, so there's lots to think about.
- Buy with someone else: Buying with a partner, friend or sibling means that you can boost your deposit amount to reach the 20% required to avoid LMI. And, if you buy with someone else, you could also be eligible for the First Home Guarantee, meaning you don't necessarily need 20%.
- Find another lender: Sometimes, we have clients come to us who go straight to their everyday bank. Their bank then required them to pay a substantial LMI fee. But the beauty of having a wide range of lenders available to us is that every lender has a different LMI policy. Often, we can find another that has the same (or lower) interest rate and allows them to avoid LMI.
Professions that may be eligible to not pay LMI
Weirdly enough, lenders are often happy to waive the LMI fee if you are a professional or healthcare professional - as they tend to view these borrowers as low risk. There is a list of specific professions, that can have a loan-to-value ratio of up to 90% without being required to pay LMI. Get in touch with us directly to find out if you're industry is on the list!
Talk to us about your options
We do this day-in, day-out - which means we know what policies and strategies can get you the most out of your budget. Let's chat through your goals and options! Chat with our Mortgage Choice team in Boronia & Ferntree Gully!
