Saving for a deposit and buying your first home is hard enough. And if you’re trying to add to your property portfolio but have existing debts, finance can be harder to come by. Further to this, if you’re unable to provide a deposit of at least 20% of the property’s purchase price, you could be forced to pay the dreaded Lenders Mortgage Insurance (LMI). LMI allows borrowers with a smaller deposit (often as low as 5%) to secure a mortgage but comes with at a cost.
If you’re reading this, you’re probably hoping to find out how to avoid paying Lenders Mortgage Insurance. Avoiding LMI can result in substantial savings. To help you get there, we explain what Lenders Mortgage Insurance is, and some ways to potentially avoid paying it.
What is Lenders Mortgage Insurance?
Lenders Mortgage Insurance is a type of insurance that protects the lender in the event the borrower defaults on their home loan . While it provides security for the lender, the cost is typically borne by the borrower. LMI is generally required when borrowing more than 80% of the property’s value (i.e., a Loan-to-Value Ratio (LVR) greater than 80%).
For hopeful first home buyers, LMI can be an unwelcome additional cost on top of the expenses associated with purchasing property. It’s calculated as a percentage of the loan and can run into thousands of dollars, depending on the size and LVR of the loan.
What is an LMI Waiver?
An LMI Waiver is a special exemption granted by some lenders, allowing eligible borrowers to bypass the usual requirement for Lenders Mortgage Insurance. This waiver is typically offered to low-risk borrowers, who are assessed based on stringent financial criteria such as a strong repayment history, higher-than-average credit scores, and stable financial backgrounds. Often, this includes professionals in stable and high-demand industries such as doctors, lawyers, accountants, and engineers.
An LMI waiver can be tricky to secure, but an experienced mortgage broker can ensure you explore every opportunity to avoid paying LMI. Let’s dive into a few strategies.
How to Avoid Paying Lenders Mortgage Insurance
Save a Larger Deposit
One of the most straightforward ways to avoid LMI is by saving a deposit that is at least 20% of the property's purchase price. This reduces the LVR to 80% or below, eliminating the need for LMI.
Family Guarantee
Some lenders offer a family guarantee or family pledge option, where a family member uses the equity in their property or an investment property as additional security for your loan. This reduces the LVR and can help you avoid LMI.
First Home Buyer Incentives
Investigate if you are eligible for first home buyer incentives or grants provided by the government. These schemes often have provisions that could help you avoid LMI.
Research Lenders with an LMI Waiver Offer
Certain lenders offer LMI waivers to specific groups of borrowers who meet strict criteria. These offers are typically available to low-risk borrowers with strong financial profiles. More on this below.
How an LMI Waiver Works
Recently, a major bank introduced a new LMI waiver for eligible customers considered low-risk. Here’s a brief overview of how this LMI waiver works:
LMI Waiver Eligibility:
- The program is available to customers deemed low risk by the bank’s assessment systems. A low-risk customer will generally have higher levels of disposable income, demonstrate strong repayment history with no adverse information on their credit score, and meet existing policy rules such as Debt to Income ratios, and serviceability requirements.
- There are no specific employment industry requirements and borrowers can access loans up to 95% LVR without needing LMI.
- Properties must be standard residential and be located in one of 145 eligible postcodes (34 Victoria). These tend to include blue chip suburbs like Kew, Hawthorn East, Brighton, South Yarra, and Toorak in Melbourne, and Coogee, Paddington, Frenchs Forest and Narrabeen in Sydney, just to name a few.
- For most properties, loans range between $2M (Minimum) - $4.75M, with higher borrowing limits for properties in specific postcodes.
Speak to Our Mortgage Brokers About How to Avoid Lenders Mortgage Insurance
The above is just one example of an LMI waiver offer. If you're not eligible but are considering purchasing a property or refinancing your home loan, and want to explore your options for avoiding LMI, our experienced mortgage brokers are here to help.
As authorised representatives of many reputable lenders, our finance brokers can guide you through the best strategies to minimise your costs and make home ownership within your reach. Contact our Melbourne mortgage brokers via the form below for a free finance consultation and take the first step towards a more affordable home loan.
