If you’re eager to buy property but don’t have a large cash deposit, then calculating the lenders’ mortgage insurance (LMI) you’ll be charged on your home loan can help you decide whether it’s worth it to go ahead – or save a bit longer towards a larger deposit.
A smaller deposit typically means a higher lenders’ mortgage insurance premium, so it will be up to you to decide whether you can afford higher monthly repayments.
It would be a wise idea to weigh up all your options before applying for a home loan in order to make an informed decision that best suits your circumstances. To assist you in this process, we’ve detailed how to calculate the lenders’ mortgage insurance on your home loan and included some tips and tricks that could help you avoid it altogether.
What Is Lenders’ Mortgage Insurance?
Lenders’ mortgage insurance (or LMI) is an insurance policy on a home loan, payable by the borrower to protect the lender.
Most home loans with a deposit of less than 20% require lenders’ mortgage insurance as security that if the borrower defaults on payments, the insurance company will cover the shortfalls.
The smaller your home loan deposit, the higher risk lenders consider you to be as a borrower. But, with lenders’ mortgage insurance, lenders could award you with a high loan to value ratio home loan with a deposit of less than 20% if you meet all the lending criteria.
Who Has To Pay Lenders’ Mortgage Insurance?
Most people who have a home loan deposit of less than 20% of the property purchase price have to pay lenders’ mortgage insurance. Different lenders might have different lending criteria, but most lenders stick to this rule to ensure additional security.
But, it’s crucial to note there are certain circumstances under which home buyers are awarded a home loan with a deposit of less than 20% – without paying lenders mortgage insurance premiums.
Therefore, borrowers must ensure they are aware of these circumstances or make use of the services of a mortgage broker to help. It would be dismal to find out later that you qualified for a lenders’ mortgage insurance waiver on your home loan, but you didn’t know and missed the opportunity.
How Can I Avoid Lenders’ Mortgage Insurance?
There are some instances where lenders don’t require lenders’ mortgage insurance on home loans as there is enough insurance to cover the shortfalls.
Some Professionals Can Avoid Paying an LMI Premium on Their Home Loan
Professionals who earn consistently high, stable incomes are considered to be low-risk borrowers.
This is because they have consistent employment within the industry and salaries and thus show financial stability. Lenders consider them less likely to default on their home loan mortgage repayments.
Different lenders will have different requirements, but many lenders will waive LMI premiums for the following professionals:
- Chief financial officers – CA, CPA, CFA etc.
- Entertainment industry professionals
- Legal professionals
- Medical professionals
- Mining specialists and mine surveyors
- Professional athletes
- Quantity surveyors
If you are one of these professionals or are in a profession with a high-income bracket, be sure to inquire with your mortgage broker or lender about whether you qualify to avoid paying LMI on your home loan.
You Don’t Have To Pay LMI With a First Home Loan Deposit Scheme
If you’re a first time home buyer, you can apply for the First Home Loan Deposit Scheme (FHLDS).
This scheme is a government initiative to help first time home buyers buy a home sooner and more easily.
The FHLDS allows borrowers to acquire a home loan with a deposit of less than 20% without paying LMI. This is because the government acts as mortgage insurers so that the borrower doesn’t have to.
There are certain eligibility criteria to be aware of when applying for a home loan with an FHLDS, such as the property must be owner-occupied and that there will be a maximum limit imposed on the total loan amount that can be offered by lenders.
You Can Avoid Paying LMI on Your Home Loan if You Have a Guarantor
Borrowers can ask a family member to act as a guarantor by using the equity in their property as the security for your home loan.
If they have enough equity in their property, they can provide the balance you require for your deposit to reach 20%.
This way, the lender doesn’t need lenders’ mortgage insurance as security.
How Do I Calculate Lenders’ Mortgage Insurance?
If you aren’t eligible for these options of avoiding the LMI cost, you shouldn’t be despondent. You can calculate LMI yourself and establish whether the cost is within your budget or not.
Your LMI premium will depend on your loan to value ratio and the home loan amount you wish to borrow. And, depending on your lender and LMI provider, the fees can differ substantially.
You can go to the website of lenders you’re considering borrowing from and use their lenders’ mortgage insurance calculator. Although it won’t be 100% accurate and should just be considered a ballpark figure, an LMI calculator can give you an idea of which deal is more appropriate for your financial goals.
How The Mortgage Agency Can Help
At The Mortgage Agency, our mortgage brokers are specialists when it comes to helping borrowers navigate the LMI premium on their home loans.
Our mortgage brokers have many years of experience in assessing borrowers’ individual circumstances and offering expert advice.
We can calculate your borrowing power and establish whether the purchase price of the property you want to buy is within your means.
Our mortgage brokers can identify whether you’re eligible or not to pay LMI by analysing your financial situation.
If you don’t qualify for a waiver, we can assist you with a lenders’ mortgage insurance calculator and also provide more detailed estimates or calculations to establish your premiums.
Lastly, a mortgage broker from The Mortgage Agency will negotiate with your lender and LMI provider for the best possible interest rates and premiums to suit your financial situation.
Most borrowers with a home loan deposit of less than 20% must pay lenders’ mortgage insurance (LMI).
This premium protects the lender should the borrower default on their home loan mortgage repayments.
But, there are some cases where borrowers can avoid paying LMI, such as:
- certain professionals,
- first home buyers using the First Home Loan Deposit Scheme, and
- borrowers with a guarantor.
If you do have to pay for lenders’ mortgage insurance on your home loan, most lenders’ websites have an LMI calculator. An LMI calculator can be used to get a rough idea of what your premium will amount to.
Taking out a home loan doesn’t have to be stressful and confusing. Our mortgage brokers from The Mortgage Agency can assist you with your journey to home ownership, from navigating LMI to helping you through the application process.
Contact us today to get started.
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.