Key Insights
- Lenders Mortgage Insurance (LMI) might sound like alphabet soup, but it’s a financial twist in your home-buying tale. Think of it as a buffer for lenders when your deposit waltzes in below 20% of the property’s value. It’s their insurance policy, but you foot the bill. 🧐💰
- Cracking the LMI code involves a complex dance of property value, deposit size, and loan type.
- Ways you can avoid paying LMI: By having a 20% deposit, seeking help from family OR government schemes.
What is LMI and How can you avoid paying?
Let’s talk about lenders mortgage insurance – yawwwwn – but this super boring term is actually super important to your home loan application process and could cost you a lot of money, so listen up 👂
We are going to tell you what LMI is, how much it costs, how it can benefit you, how you can avoid paying for it, and how you can insure your own mortgage repayments without it.
Key facts about lenders mortgage insurance
- LMI is added to your total home loan amount as a one-off lump sum
- It acts as insurance that covers your lender (not you) if you default on your home loan.
- It is completely avoidable by…
- Saving for a bigger deposit (more than 20% of your total home loan.)
- Taking advantage of specific government schemes e.g. Keystart home loans.
- It doesn’t go away if you refinance later.
What is lender’s mortgage insurance (LMI)?
Lenders mortgage insurance (LMI) is insurance that covers only the lender for the total of your outstanding loan balance if you can’t meet your mortgage repayments and default on your home loan.
Like a fee for being a riskier borrower, LMI is charged as a one-off cost and added on top of your loan in a lump sum. However, LMI only gets added to your home loan if your deposit doesn’t meet the lending criteria set by your chosen financial institution (i.e. your deposit is too small).
It exists because lenders, see it as a risk to give a loan to someone who might not have discipline with money and savings, so they like to cover their 🍑
How much does LMI cost?
LMI is calculated based on how much you’re borrowing to buy a house and how much deposit you have towards the purchase. If you are borrowing more than 80% of the purchase price, LMI will be charged by the lender.
LMI can be a decent chunk of change and there are a number of factors that affect the cost of LMI:
- The property value of the home you wish to purchase
- The size of your home loan deposit (how much you pay upfront)
- The size of your home loan (how much you’re borrowing after paying your deposit)
- The type of loan you are applying for (Whether you are an Investor or owner occupier)
- Your employment status (Self employed, contractor, full-time, unemployed etc)
- Your loan term (how long you will be repaying your loan back)
Are there any benefits to paying for LMI?
We always recommend avoiding LMI when possible because almost every benefit of LMI is felt by your lender. However, if you really can’t avoid it, here is why it’s not all bad!
If you pay for LMI…
- You wont need a guarantor to supply additional security to your home loan.
- You can get into the housing market sooner (and stop paying rent).
How can I avoid paying LMI?
Like stamp duty, LMI can be a decent chunk of change – but unlike stamp duty, LMI can be completely avoided, here’s how…
- Save a 20% deposit!
If you are borrowing more than 80% of the purchase price, LMI will be charged by the lender so saving a deposit of 20% or more of your total home loan amount will save you. Simple in theory…For example, your working with a budget around $550,000. That means you’ll need to save a $110,000 deposit to avoid paying that LMI premium. - Hit up the Bank of Mum and Dad.
If you think your folks might be able to help you out, you can be ‘gifted’ money that can be counted towards a deposit. (Note that this is not seen as ‘genuine’ savings so you’ll still need to show you can save!)
- Still on the help from parents
If your folks can’t help you with cash, they might be able to be a ‘guarantor’ for your home loan. (Basically it means that Mum and Dad are responsible for paying back the loan if you can’t.) - Check your eligibility for Government schemes
If you didn’t know, there are heaps of Government schemes that help you with the cost of purchasing a new home, such as; First Home Guarantee, Family Home Guarantee, First Home Owners Grant (FHOG) and Keystart Home Loans - If you’re thinking about building, check what assistance your builder can offer.
With the help of our finance partners, Easystart supports home buyers with the awesome No Savings Home Loans and super handy Deposit Assistance. - Compare different lenders
Some lenders will accept a smaller deposit, whereas others are more risk averse. It really pays to shop around! Our finance team are in the know and can direct you to these lenders (saving you time).
But what if you just can’t meet the 20% deposit requirement?
Don’t worry! There are special home loans that you may be eligible for where LMI isn’t charged. Check out our info on Keystart home loans which help first home buyers with deposits as little as 2% buy their own home (and avoid LMI).
Can I get rid of it later if I refinance my home and am earning more?
No, lenders mortgage insurance is not transferable, so you can’t get rid of it by refinancing your house later on!
Mortgage Protection Insurance vs Lenders mortgage insurance
So if we are going to talk about lenders mortgage insurance (that covers your lender) if you default on your home loan, we thought it might be worth talking about mortgage protection insurance (that covers you).
Is finding 20% to avoid LMI the least of your problems? What if you have a high paying job that allows you to save quickly, but pays high because it isn’t exactly “risk-free”? This is where mortgage protection insurance comes in.
Mortgage protection insurance can help you with your loan payments for an agreed-on period if you are unable to pay them, due to serious illness, death, or any other event that is covered in your agreed insurance policy.
If you can afford it, it can give you peace of mind, which might one-day be worth as much as the house you are paying off!
Don’t want to pay LMI, but want to get in your home sooner?
Everyone’s cash sitch is different. That’s why Easystart offers different solutions to everyone. Our friendly and experienced finance team will look carefully at your personal situation and consider all the different options available and recommend the solution(s) that fits you best. Check out our thorough Finance Guide including our helpful Home Finance Tools and start your new home journey – easy as!
