Saving for the 20% home deposit takes an average of 4.6 years, rising to over eight years for those buying in Sydney. Thus saving for a deposit can make the great Australian dream of buying a home seem out of reach. Paying loan mortgage insurance is one way of buying a home without having the 20% deposit which is typically required by most lenders.
What is Loan Mortgage Insurance or LMI?
Banks require customers to pay the LMI premium when they have less than a 20% deposit for a home loan. Loan mortgage insurance insures the lender, not you. If a customer were to default on their loan and the bank incurs a loss after selling the property, LMI protects the bank against this loss.
So how much is the loan mortgage insurance?
The LMI premium can add tens of thousands to a borrower’s loan. The LMI premium is based on the loan to value ratio and the loan amount and varies from lender to lender. Let’s say you’re purchasing an $800,000 property in Sydney and you only have a $100,000 genuinely saved deposit. Depending on the lender, the LMI premium ranges from $23,000 to $27,000. This is a lot of money. Is there a way to avoid paying loan mortgage insurance?
Save for a higher deposit
The purpose of LMI is to protect lenders should the borrower fail to make loan repayments when the LVR exceeds 80 per cent. When the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk to the lender of not recouping their costs, should the borrower default, is increased. A higher deposit means a smaller loan amount and therefore a lower 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.
LMI waivers for medical practitioners, accountants, solicitors, dental practitioners and other medical specialists
This is often referred to as the medico policy by most of the major lenders.
If you are an eligible medical professional and applies for new or increased lending and has a loan to value ratio (LVR) of up to 95% , a major lender will waive the premium on the Lenders Mortgage Insurance for that loan – with no minimum income required. In this scenario, if you are buying this means you will only need savings of at least 5% of a property’s value, plus stamp duty. For a purchase price of $800,000, the LMI savings is $36,187.
The LVR policy of LMI waiver at 90% or less is available with other lenders and for other professions including accountants, legal professionals and dental practitioners.
Take advantage of the First Home Loan Deposit Scheme
The First Home Loan Deposit Scheme aims to help up to 10,000 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. You can find out more about the First Home Loan Deposit Scheme Works here.
Can Mum and Dad help?
If you don’t have the financial capacity to meet a 20% deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor and they use the equity in their property to help you secure yours and keep your total loan below 80%. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all. Ask your bank about family guarantee, family pledge or parental guarantee.
85% LVR with waived LMI
There are a couple of non-bank lenders lending if you only have a 15% deposit without paying loan 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 is suitable for your situation.