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How do you avoid Lender's Mortgage Insurance?

How do you avoid Lender's Mortgage Insurance?

Lender’s 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 per cent, as these mortgages are considered riskier than borrowing with a full deposit. The lower the borrower’s deposit, the higher the cost of LMI, which can add tens of thousands of dollars to the upfront cost of a home loan.

Pay a higher deposit

The simplest way to avoid paying for LMI is to save up a 20 per cent deposit on the property you’re buying. If you can’t realistically save up the full 20 per cent, you could aim for 15 per cent, or even 10 per cent – 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.

Borrowers who already have a mortgage and are looking to refinance their home loan or 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 per cent of the property value, you’ll also have to pay for Lender’s Mortgage Insurance, even if you were already charged LMI when you took out your first home loan – LMI is not transferable. 

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 other 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.

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.

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 of these options may be available to every borrower, one of more of these options 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. As long as you fulfil the terms and conditions, these grants can go towards your deposit, lowering your LMI costs.

  • First Home Loan Deposit Scheme (FHLDS) – This federal government program allows Australians to buy property with a deposit of just 5 per cent and pay no LMI, with the government effectively guaranteeing the remaining 15 per cent. 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 you 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.

  • Family Home Guarantee (FHG) – Similarly to the FHLDS, the FHG (available from 1 July 2021) allows single parents to buy their first home with a deposit of just 2 per cent, and pay no LMI thanks to the government guaranteeing the remainder of the deposit. Also similarly to the FHLDS, 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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This article was reviewed by Personal Finance Editor Alex Ritchie before it was published as part of RateCity's Fact Check process.

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