Lenders mortgage insurance (LMI) is one of the most unappealing costs of homeownership. It’s frustrating to consider that if you don’t have enough to cover a 20% deposit, you’re potentially required to pay additional for LMI. This ensures that the lenders are covered in the event you default on your loan.
If this sounds like a predicament you’re in, don’t worry – there are possibilities to work around this.
In this article, we’ll cover the potential options that may be available for you to circumvent paying lenders mortgage insurance despite not having a 20% deposit. Here’s what you need to know.
Why Do You Have To Pay Lenders Mortgage Insurance?
When you take out a home loan from a lender, they bear the risk of you defaulting on your mortgage repayments.
At times, the deposit you have paid out of your own pocket may not even cover all expenses of selling your home if it was repossessed due to you defaulting on your loan.
Therefore, lenders require borrowers to take out insurance unless they pay a 20% upfront deposit.
What Is a Loan-to-Value Ratio?
In a nutshell, a loan-to-value ratio (LVR) calculates the value of a home loan as a percentage of the property value.
You can use the deposit amount you’re able to pay towards your home loan to work out your LVR.
For example, if you have $50,000 saved up towards a deposit, and the purchase price of the property you’re interested in is $500,000, you will be able to pay a 10% deposit, and your LVR will be 90%.
Some lenders have a maximum LVR of as high as 95%, but that will entail having to pay LMI on your home loan.
To avoid paying lenders mortgage insurance, you need an LVR of at least 80% – meaning you’re going to have to pay a 20% deposit towards your purchase. Understanding how to use LVR to your advantage can be beneficial, so it’s worth doing some research.
What Are the Exceptions?
Lenders can make exceptions to this 20% deposit rule, provided they believe there’s additional security that the borrower won’t default on their home loan repayments.
So, how can borrowers give lenders enough security?
Certain professionals, such as medical professionals, may qualify for an LMI waiver because lenders see them as low-risk borrowers. It’s unlikely that they will default on their home loan repayments because of their field of work.
The second way is by having someone else guarantee your loan, whether it’s your family or the federal government.
How Professionals Qualify for Waived LMI on Their Home Loans
Professionals who have consistent employment and salary, thus showing financial stability are considered very attractive to lenders.
Therefore, lenders don’t require them to pay for lenders mortgage insurance, even if they pay less than a 20% deposit on their home loan.
Some of these professionals include:
- IT professionals
- Medical professionals
- Quantity surveyors
How a Family Pledge Loan Can Help Avoid Paying Lenders Mortgage Insurance
If your parents or a family member has their own property, they may be able to offer up the equity of their home as insurance on your home loan in what’s commonly known as a family pledge loan.
For example, suppose you have a 10% deposit in savings. In that case, your family can use their home equity to pledge security for the remaining 10% of the property value so that your loan-to-value ratio is 80%.
This is quite a popular option in Australia, as parents are often more than willing to help their kids become homeowners sooner – especially if they have the means to do so, and generally not an issue as they would have built up a substantial amount of equity.
Why Being a First Home Buyer Can Be Beneficial To Avoid Paying LMI Premiums on Your Home Loan
First home buyers can apply for the First Home Loan Deposit Scheme (FHLDS) with the federal government.
This home loan deposit scheme allows first home buyers to enter the real estate market sooner.
Many young professionals are not financially able to save a 20% deposit but would still like to enter the property market. With the FHLDS, they can buy or build property with less deposit because the government acts as a guarantor for the home loans.
So, the borrower doesn’t have to pay for lenders’ mortgage insurance because banks or non-bank lenders see a guarantee as sufficient security.
In fact, the National Housing Finance and Investment Corporation (NHFIC) can guarantee up to 15% of a borrower’s deposit.
How Can the Mortgage Agency Help?
When making large financial decisions about your future as a home buyer, whether you have to pay lenders mortgage insurance (LMI) on your home loan or not, it’s always recommended to seek professional advice.
At The Mortgage Agency, our mortgage brokers work towards your goals and then assess your financial situation, as well as your personal circumstances.
Then we advise on which home loans, products and features you’re eligible for from different lenders and which will best suit you.
Once you decide the way forward, a mortgage broker from our team can guide you through your journey to home ownership.
Our mortgage brokers can provide specialised advice on lenders’ mortgage insurance and help you pay the smallest possible amount on your home loan. We have relationships with most leading lenders and are prepared to negotiate the lowest fees and rates for our clients.
Begin your ascent up the property ladder today, and contact a mortgage broker for assistance.
Please note that every effort has been made to ensure that the information provided in this guide is accurate. You should note, however, that the information is intended as a guide only, providing an overview of general information available to property buyers and investors. This guide is not intended to be an exhaustive source of information and should not be seen to constitute legal, tax or investment advice. You should, where necessary, seek your own advice for any legal, tax or investment issues raised in your affairs.