What is LMI? A simple guide to lenders mortgage insurance

Understanding Lenders Mortgage Insurance (LMI): How to Avoid It and Save Thousands

Many first-time buyers are shocked when they learn about Lenders Mortgage Insurance (LMI)—an additional cost that can add thousands of dollars to their home purchase. LMI is typically required by lenders when the borrower has a deposit of less than 20% of the property value. In this blog, we will explain what LMI is, why lenders require it, and how you can potentially avoid paying it, saving yourself thousands of dollars in the process.

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance is an insurance policy that protects the lender (not the borrower) in case the borrower defaults on their home loan. Since borrowers with a smaller deposit are considered higher risk, lenders require LMI to mitigate this risk. It’s important to note that while LMI protects the lender, the cost of the insurance is borne by the borrower.

LMI can cost anywhere from a few thousand to tens of thousands of dollars, depending on factors such as the loan amount, property value, and the size of your deposit. LMI can either be paid upfront or added to your loan amount, which means you'll be paying interest on it over the life of the loan.

How Much Does LMI Cost?

The cost of LMI depends on a variety of factors, including:

• Loan Amount: The larger your loan, the higher the LMI premium.

• Deposit Size: The smaller your deposit, the more expensive LMI will be. Generally, borrowers with a 10% deposit will pay more in LMI compared to those with a 15% deposit.

• Lender and Insurer: Different lenders may have different LMI premiums, and they may work with different insurers. It’s worth comparing lenders to see how much LMI could cost you.

You can use an LMI calculator to get an estimate of how much LMI might cost based on your deposit and loan amount.

How to Avoid Paying LMI

There are several ways to avoid paying Lenders Mortgage Insurance or reduce the cost significantly:

1. Save a 20% Deposit

The simplest way to avoid LMI is to save at least 20% of the property value as a deposit. While this may take longer, it can save you thousands of dollars in LMI costs. Additionally, a larger deposit means you'll need to borrow less, which can also reduce your overall interest payments.

2. Use the First Home Guarantee

The First Home Guarantee (formerly the First Home Loan Deposit Scheme) allows eligible first-time buyers to purchase a property with as little as 5% deposit without needing to pay LMI. The government guarantees up to 15% of the property value, reducing the lender's risk and eliminating the need for LMI. To learn more about eligibility requirements, visit the First Home Guarantee website.

3. Get a Family Guarantee Loan

Some lenders offer family guarantee loans, which allow a family member—usually a parent—to use the equity in their property as additional security for your loan. By providing additional security, the lender’s risk is reduced, which means LMI is not required. This can be a great way to avoid LMI, but it’s important to understand the risks involved for the guarantor.

4. Negotiate with the Lender

In some cases, lenders may be willing to waive LMI for certain borrowers, particularly if you have a strong financial profile, stable employment, and good credit history. It’s always worth asking your lender if they have any LMI waiver programs or discounts available.

5. Look for Professional Discounts

Certain professionals, such as doctors, accountants, and lawyers, may qualify for special home loan packages that allow them to borrow more than 80% of the property value without paying LMI. These packages are typically available to professionals with a stable income and low risk of default.

Pros and Cons of LMI

While LMI is an additional cost, it does have some benefits for borrowers, particularly for those who do not have a 20% deposit:

Pros

• Access the Property Market Sooner: LMI allows buyers to enter the property market sooner without needing to save a full 20% deposit, which can be challenging in areas with rapidly rising property prices.

• Lower Deposit Requirement: With LMI, buyers can purchase a home with as little as 5-15% deposit, making homeownership more accessible.

Cons

• Cost: LMI can be a significant additional expense, costing thousands or even tens of thousands of dollars.

• No Benefit to the Borrower: LMI protects the lender, not the borrower, in the event of default. The borrower still bears the cost of the insurance.

Case Study: Avoiding LMI with the First Home Guarantee

Amy, a first-time buyer, wanted to purchase a home worth $600,000 but only had $40,000 saved for a deposit. Normally, she would need to pay LMI since her deposit was less than 20% of the property value. However, Amy qualified for the First Home Guarantee, allowing her to buy the property with a 5% deposit without paying LMI. By using this scheme, Amy saved approximately $15,000 in LMI costs, allowing her to allocate those savings toward other expenses, such as moving costs and furnishing her new home.

Final Thoughts

Lenders Mortgage Insurance can be a significant expense for first-time buyers, but with careful planning and by taking advantage of government schemes and other options, you may be able to avoid paying it. Whether it’s saving for a larger deposit, using a family guarantee, or exploring other pathways, understanding your options can help you make informed decisions and save thousands of dollars.

Ready to Buy Your First Home?

If you're considering purchasing your first home and want to explore options to avoid Lenders Mortgage Insurance, APEX FINCAP is here to help. Our team can guide you through the various home loan options, government schemes, and provide expert advice to help you save on your journey to homeownership. Contact us today to discuss your options and get started.

Legal Disclaimer

The information provided in this blog post is general in nature and does not constitute financial, accounting, or legal advice. We encourage readers to seek expert advice tailored to their specific circumstances from qualified professionals. APEX FINCAP can provide referrals to trusted accountants, financial advisors, and legal experts within our network to ensure you get the right support for your home-buying journey.