For many Australians looking to buy their first home or invest in property, Lenders Mortgage Insurance (LMI) is often a confusing and costly hurdle. If you’re considering buying a home with less than a 20% deposit, you’ll likely need to pay LMI. But what exactly is it, and how can you avoid it? As an experienced mortgage broker Northern Beaches residents trust, we’ll break it down for you in this guide.
What is Lenders Mortgage Insurance (LMI)?
LMI is an insurance premium that protects the lender, not the borrower. If you default on your home loan, the lender is covered for any shortfall that may arise from selling the property. While LMI is designed to reduce the lender’s risk, the cost is passed on to the borrower—meaning you have to pay for an insurance policy that doesn’t directly benefit you.
How Much Does LMI Cost?
The cost of LMI varies depending on several factors, including:
The loan amount
The deposit size
The lender’s policy
Generally, the lower your deposit, the higher the LMI premium. For example, if you’re borrowing 90% of a property’s value, your LMI premium could be several thousand dollars, often added to your loan amount and repaid over time.
Ways to Pay for LMI
If you are required to pay LMI, you typically have two options:
Pay it upfront in cash – This means covering the cost as an additional expense on top of your deposit.
Add it to your home loan – Some lenders allow you to capitalize the LMI premium into your mortgage, meaning you repay it over time with interest.
How to Avoid Paying LMI
While LMI is unavoidable in some cases, there are several strategies you can use to reduce or eliminate this expense:
1. Save a 20% Deposit
The simplest and most effective way to avoid LMI is to have at least a 20% deposit. This means you are borrowing 80% or less of the property’s value, reducing the lender’s risk and eliminating the need for LMI.
2. Use a Family Guarantee Loan
A family guarantee loan allows a close family member (usually parents) to use the equity in their home as security for a portion of your loan. This additional security can reduce the lender’s risk, allowing you to avoid LMI even with a smaller deposit.
3. Take Advantage of Government Schemes
The Australian government offers several programs designed to help first home buyers avoid LMI, including:
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.
Regional First Home Buyer Guarantee – A variation of the FHLDS for those purchasing in regional areas.
First Home Owner Grant (FHOG) – While not directly related to LMI, this grant can boost your savings to help you reach a 20% deposit faster.
4. Choose a Lender With Special LMI Waivers
Some lenders offer LMI waivers or discounts based on specific criteria. For example, if you work in certain professions (such as medicine, law, or accounting), some lenders may allow you to borrow up to 90% of the property’s value without requiring LMI. A mortgage broker Northern Beaches locals rely on can help identify lenders that offer these benefits.
5. Consider Alternative Lenders
Certain lenders, such as Own Home or Sucasa, have unique loan structures that allow borrowers to avoid LMI, even without a 20% deposit. These lenders may have different eligibility requirements, so working with a knowledgeable mortgage broker can help determine if this is a suitable option for you.
Is LMI Always a Bad Thing?
While avoiding LMI is ideal, sometimes paying LMI can be a strategic move. Here’s when it might make sense:
Entering the market sooner – If property prices are rising, waiting to save a 20% deposit might mean you end up paying more for a home later. Paying LMI now could allow you to buy sooner and benefit from potential capital growth.
Investing opportunities – If you’re a property investor, paying LMI to secure a high-growth property could outweigh the upfront costs in the long run.
How a Mortgage Broker Can Help
Navigating LMI and finding the best mortgage options can be complex. That’s where a mortgage broker comes in. A mortgage broker Northern Beaches residents trust can:
Compare lenders to find the best LMI-free options
Help you access government schemes
Assist with family guarantee loans
Find lenders that offer LMI discounts based on your profession
Final Thoughts
Lenders Mortgage Insurance (LMI) is a significant cost that many homebuyers face, but with the right strategy, it can often be avoided. Whether it’s saving a larger deposit, using a family guarantee, or taking advantage of government programs, there are several ways to reduce or eliminate this expense.
If you’re unsure about your options, working with a mortgage broker Northern Beaches locals rely on can make the process much easier. Contact us today to discuss how you can secure a home loan with minimal costs and the best possible terms.