Lenders Mortgage Insurance (LMI) applies to home loans with a deposit of less than 20%, applied by lenders and paid as an upfront cost by the borrower. The purpose of LMI is insurance for the lender if the borrower defaults on the loan, as low deposit loans are considered a higher risk. The amount will depend on the loan amount.
Upfront costs such as Stamp Duty and conveyancing fees are a part of buying property and taking on a mortgage. LMI is another upfront cost that some borrowers will need to face. It can be required on all types of property loans taken out by owner-occupiers and investors where the deposit is less than the accepted 20%. It can apply to new mortgages and when refinancing.
Unlike most insurance policies which have to be renewed with premiums on an annual basis, LMI is a one-off charge. But it is non-refundable and cannot be transferred to a new property loan or when refinancing with a different loan and lender.
When saving for a home loan, many focus on the deposit without giving full consideration to the upfront costs they will also need to pay. Where these costs have to be covered from what has been saved, this may further reduce the funds available for the deposit.
Are there any ways that property buyers can avoid this cost? Let’s consider the options.
Avoiding Lenders Mortgage Insurance
LMI is required when the deposit on a home loan is below the standard 20% deposit threshold.
You’ve saved a certain amount for a home deposit. But when you start checking out the property market and find your ideal type of home in your preferred location, you discover that the amount you’ve saved is below the required 20% for the price of the home.
You will be required to LMI or consider the options available to avoid that upfront cost.
So essentially buyers in this situation face the prospect of:
- Deferring their purchase until they have saved the required deposit, or
- Borrowing the funds to make up the 20% deposit from a family member, or
- Considering properties at lower prices, in line with the funds they have available for a home loan deposit.
Consider the scenarios around these courses of action.
First, deferring the purchase and continue with the saving plan. Depending on your income and expenses, it may take some time for your savings to reach the target 20% deposit amount. Interest earned on standard savings accounts is typically not very high and the rate can change with the RBA cash rate decisions. In short, the savings will not likely grow very fast unless you can find more to put away from your income. A pay rise may help or seeking a higher paid job may be a possibility.
Meanwhile, while you are diligently saving, property prices are probably rising. Over time, property prices will generally increase. This is why property is seen as a great investment. By the time you’ve reached your initial savings target, the price on that ideal home may have gone up. And with that, the deposit required is also higher.
Next, what about borrowing the extra deposit from a family member? The bank of Mum and Dad is a very popular way for many young buyers to get into the property market. But this option is not available to all families. If it is available to you, and does not create issues within the family, then it can be very helpful. If the family member expects repayments, these will need to be factored in when budgeting for mortgage payments. Lenders may ask for such arrangements to be included in applications.
If the family member who loaned the funds suddenly requires the money repaid for their own purposes such as urgent medical care, you may have to take out another loan to make the repayment.
Another option to avoid paying LMI is to find a home that suits, possibly not ideal, but is in a lower price range. A price range that your savings does allow for the 20% deposit requirement. The property may not be your dream home or in the suburb that you prefer. But if it’s a good property, liveable, large enough and ticks a lot of boxes, buying that home now, may be a smart move.
Making small compromises on property selection may mean avoiding LMI which can significantly reduce the upfront costs. The lower price will also mean less Stamp Duty to pay. Lowering overall total upfront costs. Use our Calculators to see how much Stamp Duty you may save by purchasing a property at a lower price.
Buying that property and planning to live in it for, say, a few years, may pay dividends. As you make the regular monthly mortgage payments you are building equity in the property. Equity that may be used as a downpayment on your next property, which may be that dream home.
Benefits of Paying Lenders Mortgage Insurance
Buyers with less than 20% deposit that are required to pay LMI can see it as a burden and an upfront, non-refundable expense. But there can be benefits in ‘taking the medicine’ and paying that cost.
LMI allows buyers without the full deposit to get into the property market. To take that first step on the property and home ownership ladder. Once you have made that move and make the mortgage payments on time, you’re building a good credit profile and equity in the property — positives that may enable you to move up the property ladder and/or invest in property to grow wealth.
While LMI may be a cost, it can also be an opportunity.
Connect with Yes Home Loans brokers on 1800 000 937 for expert advice on home loans, Lenders Mortgage Insurance and deposits.
DISCLAIMER: THE INTENTION OF THIS ARTICLE IS TO PROVIDE INFORMATION OF A GENERAL NATURE ONLY. THE ARTICLE IS NOT PROVIDED WITH THE INTENTION OF BEING THE ONLY SOURCE OF INFORMATION ON WHICH PROPERTY BUYERS SHOULD MAKE THEIR DECISIONS. BUYERS WHO NEED GUIDANCE AND ADVICE ON PROPERTY LOANS BASED ON THEIR INDIVIDUAL CIRCUMSTANCES ARE ADVISED TO CONSULT WITH A SPECIALIST MORTGAGE BROKER OR FINANCIAL CONSULTANT. NO LIABILITY IS ACCEPTED FOR MISREPRESENTATION OF FOR ANY ERRORS IN DATA, POLICIES AND SPECIFIC DETAILS THAT HAVE BEEN OBTAINED FROM OTHER SOURCES.