Buying a home is an exciting milestone, but for many Australians, saving a 20% deposit can feel like a daunting challenge. Without a substantial deposit, lenders often require Lenders Mortgage Insurance (LMI) to protect themselves against the risk of borrower default.
While LMI provides benefits to lenders, it’s an added cost for homebuyers that can significantly increase the overall cost of purchasing a property. In this guide, we’ll explain what LMI is, why it’s required, and strategies you can use to avoid paying it.
What is Lenders Mortgage Insurance (LMI)?
LMI is a one-off insurance premium that protects the lender—not the borrower—if you default on your loan and the property is sold for less than the remaining loan balance.
When is LMI Required?
- LMI is typically required when a borrower has a deposit of less than 20% of the property’s purchase price.
- It allows lenders to offer home loans with lower deposits, helping more Australians enter the property market sooner.
How is LMI Calculated?
The cost of LMI depends on:
- The loan amount.
- The size of your deposit.
- The lender’s specific policies.
Example:
For a $500,000 property with a 10% deposit ($50,000), LMI could cost approximately $8,000 to $12,000.
How is LMI Paid?
- Upfront Payment: Borrowers can pay the premium in full at settlement.
- Added to the Loan: Most borrowers choose to capitalize LMI, adding it to their loan balance and repaying it over time with interest.
Strategies to Avoid Paying LMI
1. Save a Larger Deposit
- Aim to save at least 20% of the property’s purchase price to avoid the need for LMI.
- While saving for a larger deposit takes time, it reduces your loan-to-value ratio (LVR) and lowers your overall loan amount.
Example:
For a $600,000 property:
- 20% Deposit: $120,000 (no LMI required).
- 10% Deposit: $60,000 (LMI applicable).
2. Use a Guarantor
- A guarantor loan allows a family member, typically a parent, to use equity in their property as security for your loan.
- By securing the loan with additional collateral, lenders often waive the LMI requirement.
Advantages:
- Avoid LMI costs entirely.
- Enter the property market sooner.
Considerations:
- The guarantor assumes financial risk if you default.
- Requires a strong, trusted relationship with the guarantor.
3. Take Advantage of Government Schemes
The Australian government offers programs to help eligible homebuyers avoid LMI:
- First Home Guarantee (FHBG):
- Allows first-home buyers to purchase a property with as little as 5% deposit without paying LMI.
- Limited places are available each financial year.
- Regional First Home Buyer Guarantee:
- Similar to the FHBG but focused on supporting buyers in regional areas.
- Family Home Guarantee:
- Helps single parents purchase a property with just a 2% deposit and no LMI.
Tip: Check your eligibility and apply early, as spots for these schemes are limited.
4. Negotiate with Lenders
- Some lenders may waive LMI for specific borrower profiles, such as professionals in high-demand industries (e.g., doctors or lawyers).
- Consult a mortgage broker to identify lenders offering LMI waivers or discounts.
5. Utilize Lender-Specific Offers
- Some lenders run promotions or offer special products that waive LMI for borrowers with slightly less than a 20% deposit.
- Be sure to compare the overall loan terms, as these offers may come with higher interest rates.
Benefits of Avoiding LMI
- Save Thousands:
- LMI can cost tens of thousands of dollars, depending on your loan amount and deposit size.
- Lower Loan Repayments:
- Avoiding LMI means you won’t add the premium to your loan balance, reducing the amount of interest you pay over time.
- More Financial Flexibility:
- Without the extra cost of LMI, you can allocate funds to other priorities, such as renovations, furniture, or an emergency savings fund.
When Paying LMI May Be Worthwhile
In some situations, paying LMI can be a strategic choice, particularly if it allows you to:
- Enter the Market Sooner: Waiting to save a 20% deposit may mean missing out on property price growth.
- Capitalize on Low Interest Rates: Borrowing with LMI during a period of low rates could save more in the long term.
- Start Building Equity: Buying sooner enables you to start building equity and benefiting from potential capital growth.
Tip: If you choose to pay LMI, ensure you’ve done a cost-benefit analysis to confirm it’s the best financial decision.
Final Thoughts
Lenders Mortgage Insurance (LMI) can help you secure a home loan with a smaller deposit, but it’s an additional cost that many homebuyers would prefer to avoid. By saving a larger deposit, leveraging government schemes, or using a guarantor, you can reduce or eliminate the need for LMI and save thousands of dollars.
At DDP, we specialize in helping Australians navigate the complexities of home loans and find the best strategies to achieve their property goals. Whether you’re a first-home buyer or upgrading to your next home, our team is here to guide you every step of the way.
