Lender’s Mortgage Insurance (LMI) is insurance that covers the lender’s risk within a residential mortgage transaction in case the borrower fails to make loan repayments. A lender considers a loan to carry a higher risk if the loan-to-valuation-ratio (LVR) is more than 80 per cent of the purchase property price, this is when LMI is payable.
If you consider that the average price of a home in Brisbane is $550,000, that would mean a deposit of around $110,000 would be required. The major benefit of LMI is that borrowers with smaller deposits are able to enter the market sooner rather than later, allowing the dream of homeownership to become a reality for a lot of first home buyers.
While LMI allows a borrower to independently purchase a property sooner than they otherwise might, it does bring with it an added expense. Here are a few ways you can avoid paying LMI:
Save a bigger deposit
A higher deposit means a smaller loan amount and therefore a lower LVR, thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.
Have a guarantor
If you don’t have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor and they use the equity in their property to help you secure yours and keep your total loan below 80%. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.
First Home Loan Deposit Scheme
On January 1st, 2020, the government rolled out their First Home Loan Deposit Scheme (FHLDS). This scheme allows first home buyers to purchase a property with a 5% deposit, the government will guarantee the remaining 15%, bringing the total to 20% removing the extra cost of LMI. To be eligible for this you must:
- Be earning up to $125,000 or $200,00 as a couple (spouse or de facto)
- Have never owned a property in Australia before
- Be an Australian citizen
- Be 18 years or over
- Have at least 5% of the value of an eligible property as deposit
- Be an owner occupier.
10,000 spaces were available initially with a further 10,000 spaces made available on July 1st, 2020. You can find full details of the First Home Loan Deposit Scheme here.
If you would like to get your foot on the property ladder please don’t hesitate to reach out to one of our friendly brokers today. The Seek Financial team are always up to date on all the latest schemes and grants available and have access to a wide panel of approved lenders.
The above information is general in nature. It has been prepared without taking into account your objectives, financial situation or needs.