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How do you avoid Lender's Mortgage Insurance?

Mark Bristow avatar
Mark Bristow
- 6 min read
How do you avoid Lender's Mortgage Insurance?

Lenders Mortgage Insurance (LMI) can make a big impact on your mortgage budget if you plan to borrow with a low deposit. Whilethere are several options available to avoid LMI, some may better suit some borrowers more than others.

What is LMI?

Lenders Mortgage Insurance (LMI) is an insurance policy that covers the financial risk of a borrower defaulting on their home loan repayments. However, LMI doesn’t protect the borrower, but instead protects the mortgage lender that provides the home loan. Additionally, most mortgage lenders pass the cost of LMI on to borrowers.

LMI is typically required whenever a borrower applies for a home loan with a deposit of less than 20% of the total home loan, as these mortgages are considered riskier than borrowing with a larger deposit.

How much does LMI cost?

LMI can potentially add tens of thousands of dollars to the upfront cost of a home loan. The exact cost of LMI you will have to will depend on the amount borrowed, the lender, and the deposit size. Generally, the lower the borrower’s deposit, the higher the cost of LMI.

How to avoid LMI

The best option for avoiding LMI  may vary depending on your personal financial situation, so it’s important to make a comparison before making a choice.

Pay a higher deposit

The simplest way to avoid paying for LMI is to save up a 20% deposit on the property you’re buying. If you can’t realistically save up the full 20%, you could aim for 15%, or even 10% – the larger the deposit you can pay up front, the lower the potential cost of your LMI.

Of course, this isn’t a practical option for many borrowers, especially in Australia’s capital cities. In the time it would take to save up a bigger deposit, your dream property could be sold to another buyer, or you could be priced out of your preferred areas by rising property values.

A small number of lenders offer home loan deals that waive LMI charges if you pay a minimum deposit, such as 15%. However, these special offers may not always be easy to find, and additional terms and conditions may apply, so they may not always be the best home loan for you.

What happens if you refinance the loan?

When you refinance, you’re essentially taking out a brand-new home loan on your property, usually for the remaining debtthat you owe. 

Borrowers who already have a mortgage and are looking to refinance their home loan to get lower repayments, or to buy an investment property, may not need to pay a deposit like they did with their first home loan, and instead rely on the equity in their property.

However, if your equity is less than 20% of the property value, you’ll also have to pay for Lenders Mortgage Insurance, even if you were already charged LMI when you took out your first home loan – LMI is not transferable.

So, refinancing your mortgage to a different home loan is not a way to avoid mortgage insurance. Before you refinance, you may want to calculate whether the benefits of refinancing will be worth the cost of LMI.

Guarantor home loan

One popular way to avoid the costs of LMI is to get a guarantor for your home loan. This is where a parent or another close relative agrees to guarantee your home loan with the value of their own property. This could allow you to apply with a low deposit, or even no deposit, and pay no LMI as the rest of your deposit is guaranteed by your parents or relatives.

A guarantor home loan isn’t a viable option for everybody. Your parents will need to own property with enough equity available to guarantee your mortgage. If you default on your mortgage repayments, your guarantor will become responsible for your home loan, which could be a real test for both their finances and your familial relationship. Make sure that all parties involved are aware of the risks before signing up for a guarantor home loan.

Check if your profession can help you save on LMI

Certain professionals such as lawyers, accountants, doctors, and others are sometimes eligible to borrow with a smaller deposit without needing to pay LMI. 

These professions include:

Not all lenders offer LMI-free home loans for professionals. There may also be other terms and conditions to qualify for one of these specialist loans, which aren’t always advertised – a mortgage broker may be able to help you search and apply for one of these loans.

Grants and incentives

Depending on your location and financial situation, there may be a range of options available from the state and federal governments to support your property purchase. While not all these options may be available to every borrower, one or more may be able to help cover your deposit, minimising or eliminating your LMI charges.

First Home Owner’s Grant (FHOG)

Most states and territories offer grants to support borrowers buying their first homes. If you fulfil the terms and conditions, these grants can go towards your deposit, lowering your LMI costs.

Home Guarantee Scheme (HGS)

This federal government program, formerly known as the First Home Loan Deposit Scheme (FHLDS), allows Australians to buy property with a deposit of just 5% and pay no LMI, with the government effectively guaranteeing the remaining 15%. There are a range of eligibility criteria for both borrowers and their properties to fulfil, and there are a limited number of places available in the scheme each financial year.

First Home Super Saver Scheme (FHSS)

Under this scheme, you can withdraw some of the extra payments you make into your super fund to go towards your deposit. While this scheme won’t cover the cost of your deposit for you, it may help you save up the money you need to cover it yourself, as money you deposit into your super fund can’t be withdrawn for everyday spending. There are a number of criteria in this scheme, as well as tax implications, so make sure you do your research, or speak to a broker, if this is something you want to pursue.

Family Home Guarantee (FHG)

Similarly to the HGS, the FHG allows single parents to buy their first home with a deposit of just 2%, and pay no LMI thanks to the government guaranteeing the remainder of the deposit. Similarly to the HGS, eligibility criteria applies, and there are a limited number of places available in the scheme per year.

Before you apply for a mortgage, it’s important to compare home loan options and consider which lenders may be able to help you achieve your personal and financial goals. Consider contacting a mortgage broker for more personal advice on the best home loan options for you, as well as assistance applying for grants and incentives.

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Product database updated 15 Jun, 2024

This article was reviewed by External Comms Lead Eden Radford before it was published as part of RateCity's Fact Check process.