How to Avoid Paying Lenders Mortgage Insurance
Lenders Mortgage Insurance (LMI) can add a significant cost to your home loan, potentially running into thousands of dollars. However, there are several strategies you can employ to avoid or minimise this expense. Let’s explore some effective ways to sidestep LMI and get into your dream home sooner.
Understanding Lenders Mortgage Insurance
Before diving into avoidance strategies, it’s crucial to understand what LMI is and why it’s charged. LMI is an insurance policy that protects the lender if you default on your home loan. It’s typically required when you have a deposit of less than 20% of the property’s lender-assessed value.
While you pay the premium, LMI doesn’t protect you as the borrower. Instead, it safeguards the lender against potential losses if you can’t repay your loan. The cost of LMI can vary significantly based on your loan-to-value ratio (LVR) and the amount you borrow.
Strategies to Avoid LMI
1. Save a 20% Deposit
The most straightforward way to avoid LMI is to save a deposit of at least 20% of the property’s value. While this may take time, it’s the surest way to sidestep LMI altogether. To achieve this:
- Create a budget and stick to it
- Set up automatic savings transfers
- Consider high-interest savings accounts or term deposits
- Look for ways to increase your income, such as a side hustle or overtime
2. Use a Family Guarantee
A family guarantee, also known as a guarantor loan, can help you avoid LMI even with a smaller deposit. Here’s how it works:
- A family member (usually a parent) offers equity in their own property as additional security for your loan
- This additional security reduces the lender’s risk, potentially eliminating the need for LMI
- The guarantor isn’t required to make any payments unless you default on the loan
It’s crucial that both you and your guarantor understand the obligations and risks involved before proceeding with this option.
3. First Home Buyer Schemes
If you’re a first home buyer, you may be eligible for government schemes that can help you avoid LMI. For example:
- The First Home Loan Deposit Scheme allows eligible first home buyers to purchase a property with as little as a 5% deposit, without paying LMI
- Various state-based first home owner grants can boost your deposit, potentially pushing you over the 20% threshold
4. Professional Package Discounts
Some lenders offer LMI waivers or discounts for professionals in certain high-income or low-risk occupations. These often include:
- Doctors and medical professionals
- Lawyers
- Accountants
If you’re in one of these professions, it’s worth shopping around for lenders offering these packages.
5. Save on Stamp Duty
While not directly related to LMI, saving on stamp duty can free up funds to put towards your deposit. Many states offer stamp duty concessions or exemptions for first home buyers or properties under certain price thresholds.
6. Consider a Split Loan
Some lenders allow you to split your loan into two portions:
- One portion (up to 80% LVR) without LMI
- A smaller portion (above 80% LVR) with LMI
While this doesn’t eliminate LMI entirely, it can significantly reduce the amount payable.
7. Improve Your Credit Score
A strong credit score can give you more negotiating power with lenders. To improve your score:
- Pay bills on time
- Reduce credit card debt
- Avoid multiple credit applications in a short period
8. Shop Around and Negotiate
Different lenders have different policies regarding LMI. Some may be willing to waive or reduce LMI fees to win your business, especially if you have a strong financial position or are borrowing a large amount.
Weighing Up Your Options
While avoiding LMI can save you money upfront, it’s essential to consider the broader financial picture:
- Waiting to save a 20% deposit might mean missing out on capital growth in a rising market
- Using a family guarantee carries risks for both you and your guarantor
- Professional packages might come with higher interest rates or fees
Avoiding Lenders Mortgage Insurance is possible with careful planning and the right strategy. Whether you choose to save a larger deposit, leverage a family guarantee, or explore professional packages, it’s crucial to consider your individual circumstances and long-term financial goals.
Remember, while LMI can be a significant expense, it also allows many buyers to enter the property market sooner. If the cost of LMI is outweighed by the potential for capital growth or the benefits of homeownership, it may still be a worthwhile investment.
Always seek professional financial advice to determine the best approach for your situation. With the right strategy, you can minimise or avoid LMI costs and take a significant step towards homeownership.