Lender’s Mortgage Insurance (LMI) is a policy whereby a premium is added to your home loan amount if you borrow more than the amount recommended by the lender.
In most cases, you will need to pay for LMI if your home loan amount is above 80 per cent of your home’s value. As the LMI premium is based on the worth of your home, it can cost you thousands of dollars. However, certain lenders may offer LMI waivers for professionals.
How does LMI work?
Taking out a mortgage requires a degree of confidence as a borrower, as it involves a considerable sum of money and being unable to repay it can adversely affect your financial health. When reviewing your home loan application, most Aussie lenders will evaluate the possibility that you may default on, or not repay, the loan amount.
If the lender decides that there is a risk of loan default when lending to you, they may ask you to pay for Lender’s Mortgage Insurance (LMI). In most cases, lenders will advise you to borrow no more than 80 per cent of your home’s value if they consider you a risk. If you borrow more than that amount, you will almost certainly need to pay for LMI.
If you are borrowing 80 per cent from the lender, you have to pay the remaining 20 per cent as the initial deposit from your savings. For example, if your home costs $600,000, the initial deposit needs to be 20 per cent, which amounts to $120,000. However, if you have only saved up $60,000 and request $540,000 as the loan amount, you may have to pay the LMI premium. However, some professionals may be eligible for LMI waivers.
What are LMI waivers, and how do I qualify?
Some banks and lenders may offer LMI waivers depending on your profession and work profile. If you earn a high salary as a professional working in specific industries, you may be viewed as a borrower with a low risk of default. In such a case, you may be eligible for flexible home loan options, including LMI waivers. Some of the professionals who may qualify for LMI waivers include doctors (and other medical professionals), accountants, solicitors and barristers, and media and entertainment industry professionals.
Qualifying for LMI waivers usually requires you to certify that you are an industry professional, by submitting proof that you are a member of reputed industry associations. Depending on your profession, you may also need to earn above a threshold, or minimum income level, to be eligible for LMI waivers.
- You should remember that LMI waivers do not cancel out the initial deposit requirement, and you may still need to put down 10% of your home’s value. Consider checking if lenders have other industry-specific requirements for LMI waivers.
In general, LMI waivers are a way of attracting borrowers who do not pose much risk of not repaying the home loan. You may be able to convince lenders about your ability to repay a higher than the recommended amount if you have an excellent credit rating with a history of timely repayments, no other debt currently outstanding, and you have sufficient borrowing power.
Can I avoid paying for LMI if I don’t qualify for a waiver?
The simplest way of avoiding paying for LMI may be to more no more than 80 per cent - and pay 20 per cent as initial deposit. However, lenders may offer you other choices, such as applying for a guarantor home loan if someone in your family offers to guarantee the loan amount.
Again, LMI waivers effectively reduce the amount of initial deposit you pay. If you are a first-time home buyer and eligible for government grants like the First Home Loan Deposit Scheme (FHLDS), you needn’t worry about qualifying for LMI waivers.