Achieving the Australian dream of owning a home has been elusive for a lot of first home buyers. This is because saving 20% of the purchase price of a home has become increasingly difficult, especially now with the rise in petrol and cost of living and unaffordable price of houses in Australia.
What is lenders mortgage insurance?
Lender’s mortgage insurance a.k.a LMI is an insurance policy that the bank takes out to protect itself against the risk that you (the borrower) will default on your loan repayment and your bank is unable to recover the full outstanding loan amount. If you don’t have the 20% deposit for the property you are purchasing, you are required by the bank to pay LMI. This is because loans above 80% of the purchase price is considered by banks as high risk.
This should not be confused with mortgage protection insurance, which is designed to protect the borrower. LMI does not protect you, the borrower. LMI protects the lender. LMI is a fairly common practice within the industry, particularly for first-home buyers who may struggle to save a 20% deposit.
Another important thing to remember is that LMI is a one-off cost. The cost of the LMI premium is dependent on several factors, such as the loan size and property value. Most insurers are flexible when it comes to the method of payment of LMI, it can either be a one-off upfront premium payment, or the premium could be included in the overall cost of the loan and included in the regular repayments.
LMI is not transferable, which means if the borrower refinances the same loan to another lender, the borrower may be required to pay a new LMI premium depending on how much equity the borrower has in the property.
What’s in it for me?
While LMI protects the interests of the lender, there is value for borrowers in paying the LMI premium.
This is because LMI enables you (the borrower) to get a home loan even if you have a small deposit, which is less than the 20% deposit. This means you are able to buy a home sooner and stop paying rent. It also enables you to buy a more expensive property with the deposit that you have. In essence, LMI allows the dream of homeownership to become a reality for a lot of first-home buyers.
How can I avoid paying LMI?
Depending on your circumstances, you could save for a higher deposit – a higher deposit means a smaller loan amount and therefore a lower Loan-to-Value Ratio (LVR) thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.
Take advantage of the First Home Guarantee Scheme
The First Home Guarantee Scheme aims to help up to 35,000 eligible first home buyers on low and middle incomes to get into the property market sooner by requiring only a 5% deposit. The government has agreed to guarantee the difference between the borrower’s 5% deposit and the standard 20% deposit required to take out a home loan without paying LMI. Under the FHBG, 35,000 places are available to eligible first home buyers from 1 July 2022 – 30 June 2023.
Can Mum and Dad help?
If you don’t have the 20% deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. Parents can use their home’s equity to guarantee part of their kid’s loans. You still need to provide proof that you can service the loan which is 100% of the purchase price. Ask your bank or broker
Can your profession save you from paying LMI?
There are LMI waivers for medical practitioners, accountants, solicitors, dental practitioners, and other medical specialists. Because borrowers in these professions are considered low risk, banks are willing to provide them with a loan at a 90% loan-to-value ratio and waive the LMI. This means that they only need to come up with a 10% deposit to purchase a home.
With a couple of these lenders, only a 5% deposit is required if the qualified medical practitioner is buying a house to live in. If you are a doctor buying a $1 million property, you can save at least $34,523 in LMI. To prove that you are an eligible medical/dental practitioner or optometrist, you need to provide your registration status with the Australian Health Practitioner Regulation Agency.
90% LVR with waived LMI for Registered Nurses
Westpac and St. George recently expanded their LMI waiver policy to include Registered Nurses and Midwives to find out more read our blog Home Loans for Nurses – 90% No LMI.
85% LVR with waived LMI
There are a couple of non-bank lenders lending if you only have a 15% deposit without paying lenders’ mortgage insurance. Depending on the lender, this product is available if you’re buying or refinancing for owner-occupied or investment purposes. There are restrictions so it is important that you speak to a broker to find out if this policy and product are suitable for your situation.
Find out more about LMI here.
Maria Papa is a senior property and finance expert specializing in home loans, investment loans, self-employed loans, alt doc loans, car loans, personal loans, and loan protection. She has offices in Sydney, Melbourne, and Manila. If you have questions, you can call Maria at 0430 144 008 or email her at mpapa@maverickfinance.com.au.
Your full financial situation will need to be reviewed prior to acceptance of any offer or product.