It’s no secret that buying a home is an expensive process. With the property market and cost of living rising, buyers may find it tricky to save for a 20% deposit – the requirement for banks to approve your home loan application.
However, recent changes have meant that buyers can be approved for a home loan with a deposit that’s less than 20% of their home’s value. Without a 20% deposit, buyers can still obtain a loan. However, they need to pay the Lender’s Mortgage Insurance (LMI) to their lender.
Although LMI can help you get your dream home faster, it’s still expensive. Additionally, it could mean you’ll have to pay more on your home loan in the long term. Actually, there are a few ways that eligible borrowers can avoid paying LMI even without a 20% deposit.
In this article, we’ll answer some common questions buyers have about LMI and how can buyers avoid LMI. We’ll also explain how a mortgage broker can help you understand LMI better and see which means of avoiding LMI is best for you:
- What is LMI?
- Why do I have to pay LMI?
- How can I avoid paying LMI?
- How can a broker help me with LMI?
What is LMI?
Lender’s Mortgage Insurance is a one-off cost that borrowers without a 20% deposit payment to lenders before their home loans are approved. Banks organise their own LMI, so you don’t have to secure this insurance through a third party. Banks also set their own LMI rates, meaning different banks charge different amounts, so comparing different loans is extremely important.
Currently, some banks are offering loans to customers who can provide as little as:
- 5% of the home’s value if they’re an owner or occupier
- 10% of the home’s value if they’re an investor
So, if your property was worth $1 million, you would require $50 000 as an owner/occupier, or $100 000 as an investor to qualify. Alternatively, you could provide a $250 000 deposit (20%) and avoid LMI altogether.
Although paying LMI is still quite expensive. If your property is worth $1.2 million, you would pay around $25 000 in LMI to qualify for the loan without a 20% deposit. These deals often come with other requirements, so it’s important to consider all your options before deciding on your loan.
Get in contact with an experienced mortgage broker to help you to evaluate your options today.
Why do I have to pay LMI?
In the past, banks would only lend to borrowers who could provide a 20% home loan deposit. Anyone who couldn’t provide 20% of the borrowed amount was seen as too risky to lend. This was because the likelihood of that borrower being unable to pay their loan back was higher.
However, recent changes have allowed more people to enter the property market, on the condition that they pay an LMI. This insurance cost protects lenders in the event where a borrower is unable to pay it back. Therefore, LMI protects the bank, not the borrower, in such an event.
LMI can help you get your dream home faster. But, it adds to the upfront costs involved with buying a home. And it may not save you money in the long term. Investigating ways to avoid LMI could help you save thousands while still getting a good deal on your home loan.
How can I avoid paying LMI?
There are some ways that buyers can avoid paying LMI even without a 20% deposit. With an LMI waiver, you can receive a substantial reduction of the LMI cost on your loan, or avoid paying it altogether. You may not be eligible for all of these options, so it’s important to do your research or speak to a broker to determine what you’ll qualify for.
Here are some ways you can avoid paying LMI:
Apply for home loans for professionals
If you’re a working professional, banks may consider you to be a low-risk borrower. This means your income is higher than average. Additionally, your profession has a good record of paying home loans back on time.
As a result, many banks have created specialised home loans for professionals, which involve a range of discounts and benefits. One of these is LMI waivers, which is where banks reduce or remove LMI costs entirely from your home loan.
Here’s a quick overview of the benefits some professionals can receive:
- Doctors: borrow up to 100% of your property’s value and pay no LMI
- Engineers: borrow up to 90% of your property’s value and pay no LMI
- Lawyers: borrow up to 90% of your property’s value and pay no LMI
- IT professionals: borrow up to 85% of your property’s value and pay no LMI
LMI waivers are just one of the many benefits involved with home loans for professionals. For more information about these loans and benefits for doctors, engineers, lawyers and IT professionals, read our other articles or get in touch with a broker for personalised advice.
Get a guarantor
If you’re not eligible for a home loan for professionals, there are other ways of avoiding LMI. One of these is to get a guarantor to provide extra loan security, helping you enter the property market faster.
A guarantor is a third party, usually a close family member, who agrees to act as a guarantor on your loan. This means that they offer one of their assets, usually their house and the equity it’s earned, as security on your loan. This asset can help you reach the 20% deposit requirement, and therefore, help you avoid paying LMI.
If you provided a 5% deposit on your loan, the equity on your guarantor’s asset would need to make up the remaining 15% to satisfy the lender’s requirement of a 20% deposit.
Every lender has different requirements for guarantors and guarantee loans. So, it’s important to ensure you’re satisfying your lender’s requirements before you apply for one of these loans.
Provide a 20% deposit
If can put forward a 20% deposit, you’ll avoid LMI altogether. This is because this substantial amount provides your loan with more security for your lender, removing the need for insurance if you were to default on your loan.
Saving for a 20% deposit can take some time and cause you to wait longer to enter the property market. However, it also means you’ll avoid a big one-off cost when buying your home and even save you money in the long term.
Alternatively, you can also read this article to know more about available LMI waivers in the market.
How can a broker help me with LMI?
LMI and the ways of avoiding it can be confusing, as it differs between lenders. Everyone’s financial situation, dream home and home buying journey are different, so getting personalised financial advice to guide you when buying a home is invaluable.
That’s where we come in.
As experienced mortgage brokers, we’re able to cut through the finance talk and give you expert advice at every stage of your home buying journey. We research and compare loans from over 30 banks so you can access the best deals on the market. We’ll save you time and heartache by helping you with complicated paperwork and chasing up banks so you don’t have to.
And best of all? We offer all our services for free.
For more information about LMI and LMI waivers, specific LMI waivers for professionals such as doctors and lawyers or getting a guaranteed loan, continue reading our articles or get in touch with us for an obligation-free chat today.
Disclaimer: The information provided is general in nature and does not constitute financial advice. Please speak to us for recommendations on your individual circumstance and requirements.