5 Strategies to Avoid Paying LMI on Your Home Loan
Lenders Mortgage Insurance (LMI) can add a significant cost to your home loan, potentially setting you back thousands of dollars. For many Australian homebuyers, especially first-time buyers, finding ways to avoid this expense can make a substantial difference in their property purchase journey. This article explores five effective strategies to help you sidestep LMI and potentially save a considerable amount on your home loan.
What is Lenders Mortgage Insurance?
Before diving into the strategies, it’s crucial to understand what LMI is and why lenders require it. 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 value, resulting in a loan-to-value ratio (LVR) of more than 80%.
While LMI allows people to enter the property market sooner with a smaller deposit, it can be a substantial additional cost. For instance, on a $500,000 home loan with a 10% deposit, LMI could cost over $8,000.
Now, let’s explore five strategies to avoid paying this extra expense.
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. This approach requires discipline and patience, but it can save you thousands in the long run.
Tips for saving a larger deposit:
- Create a budget and stick to it
- Set up automatic savings transfers
- Consider temporarily moving back home or finding cheaper accommodation
- Look for ways to increase your income, such as taking on a side job
While saving a 20% deposit can be challenging, especially in Australia’s competitive property market, the long-term benefits often outweigh the wait.
2. Use a Guarantor
If you’re struggling to save a 20% deposit, having a guarantor on your home loan can help you avoid LMI. A guarantor, typically a close family member like a parent, uses the equity in their own property as additional security for your loan.
How it works:
- Your guarantor offers a portion of their home equity as security
- This additional security reduces the lender’s risk, often eliminating the need for LMI
- Once you’ve built up enough equity in your property, you can apply to release the guarantor
It’s important to note that being a guarantor is a significant responsibility. Both you and your potential guarantor should seek independent legal and financial advice before proceeding with this option.
3. Take Advantage of Professional Package Discounts
Some lenders offer LMI discounts or waivers to borrowers in certain professions. These are typically high-income, stable professions that lenders consider lower risk.
Professions that may be eligible for LMI waivers include:
- Doctors and medical professionals
- Lawyers and legal professionals
- Accountants
- Engineers
- Teachers (in some cases)
If you’re in one of these professions, it’s worth shopping around and asking lenders about their professional package offerings. You may be able to borrow up to 90% or even 95% of the property value without incurring LMI.
4. Explore First Home Buyer Schemes
The Australian Government offers several schemes to help first home buyers enter the property market without paying LMI.
Key schemes to consider:
- First Home Loan Deposit Scheme (FHLDS): Allows eligible first home buyers to purchase a property with as little as a 5% deposit, without paying LMI.
- First Home Guarantee: Similar to the FHLDS, this scheme helps first home buyers purchase a property with a small deposit, avoiding LMI.
- Family Home Guarantee: Aimed at single parents with dependents, allowing them to buy a home with a deposit as low as 2%, without incurring LMI.
These schemes have limited places and specific eligibility criteria, so it’s essential to research and apply early if you’re interested.
5. Consider Lender-Specific LMI Waiver Programs
Some lenders offer their own LMI waiver programs for borrowers who meet certain criteria. These programs can allow you to borrow up to 85% or even 90% of the property value without paying LMI.
Tips for finding lender-specific waivers:
- Research different lenders and their offerings
- Speak with a mortgage broker who can provide information on various lenders’ policies
- Consider your overall financial situation, as these programs often have specific eligibility requirements
Remember, while avoiding LMI can save you money upfront, it’s crucial to consider the overall cost of the loan, including interest rates and fees.
Avoiding Lenders Mortgage Insurance can significantly reduce the cost of buying a home in Australia. Whether you choose to save a larger deposit, use a guarantor, take advantage of professional discounts, explore government schemes, or look for lender-specific waivers, each strategy has its own benefits and considerations.
Before deciding on a strategy, it’s essential to:
- Assess your financial situation carefully
- Consider your long-term property goals
- Research and compare different options
- Seek professional advice from a financial advisor or mortgage broker
By carefully considering these strategies and choosing the one that best fits your circumstances, you can potentially save thousands of dollars and make your dream of homeownership more achievable. Remember, the Australian property market and lending landscape can change, so always ensure you have the most up-to-date information when making your decision.