Lenders Mortgage Insurance, or LMI, is payable if you have less than a 20% deposit. However, despite what most new homeowners assume, this insurance is to protect the banks, not you. LMI covers the lender in the event the borrower cannot repay the loan. With most policies, the lender can make a claim if the borrower defaults on the loan and the sale of the property doesn’t equal the value of the mortgage.
The cost of Lenders Mortgage Insurance depends on a variety of things including:
The size of your deposit
If you can get 20% saved, you won’t need to pay LMI. If you don’t have a full deposit, you will need to pay LMI, however, it is not one set fee. The amount is higher for smaller deposits and lower for larger deposits.
The amount you want to borrow
The actual size of your home loan will impact how much LMI is payable. The higher the loan, the higher the risk, therefore, the cost of LMI will be higher as well.
A full-time worker is considered to be a lower risk than a casual worker. Like any insurance, the higher the risk, the higher the premium.
Like home, car or any other insurance, lenders have a selection of insurers they can use for LMI, with the cost varying between insurers.
How can you avoid LMI?
Lenders Mortgage Insurance doesn’t have to be part of your home loan. Here are a few ways around it:
Have a deposit
LMI is only payable for loans without a 20% deposit. While it takes time to save a deposit, it will save you thousands if you can.
Get a guarantor
Having a guarantor or help from your parents can see LMI be waived. The way a guarantor works is they are guaranteeing whole or part of the loan. It shifts the risk from the lender to the guarantor. It places a lot of risk on whoever goes guarantor for you and is something that should only be considered after getting professional advice.
Let the lender know your occupation
Some occupations are considered more secure than others such as lawyers, medical professionals, engineers, accountants and similar occupations. Due to the nature of their work, they are considered low risk and some lenders will waive the LMI for smaller home loans based on this alone.
How to reduce LMI
If you can’t do any of the options to avoid paying LMI, at the very least, get as much of a deposit together as you can. The higher your deposit, the lower your Lenders Mortgage Insurance will be. give you breathing room for a short period of time. You will need to play catch up later and try to pay extra into the loan to get back on track though.
If you want to discuss your home loan options, chat with a broker today.
This article is not to be taken as financial advice. Every applicant’s personal situation will vary. We recommend seeking professional advice for your circumstances. All loans are subject to the normal lending criteria.