When buying a home, there are a number of additional fees and charges you’ll need to factor into your budget. And when it comes to choosing your mortgage, one cost that can often be quite significant is Lender’s Mortgage Insurance.
Lender’s Mortgage Insurance (LMI) is an insurance policy that protects your lender in the event that you default on your mortgage. Lenders generally require borrowers to pay LMI if they want to borrow more than 80% for a standard loan – meaning if you don’t have a 20% deposit saved you will typically be stung with insurance that could end up costing you upwards of thousands of dollars.
How can I calculate the cost of LMI?
LMI is calculated based on the loan amount and the loan-to-value ratio (LVR). Generally speaking, the higher the LVR, the higher the risk to the lender and the more you will pay for LMI.
Online tools such as RateCity’s LMI Calculator can provide you with an estimate of your LMI payment. Simply enter the value of the property you want to buy, and the amount you plan to borrow to purchase the property. For example, if you’re planning to buy a $500,000 property with a 15 per cent deposit of $75,000, your loan amount will be $425,000.
Calculating an estimate of your LMI payment can allow you to more accurately budget for your property purchase and avoid being blindsided by unexpected costs.
How can I avoid paying lenders mortgage insurance?
The simplest way to avoid paying LMI would be to save a deposit of at least 20% before you start shopping for a new home. However, a 20% deposit on a home loan of $500,000, is $100,000, which is a substantial amount of money to put aside. Plus, if you’re planning to buy property in one of Australia’s biggest capital cities, chances are you’ll be spending much more.
If you are a first home buyer, you may be eligible for a government grant or subsidy that could help you get into the property market sooner.
For example, the Australian Government’s First Home Loan Deposit Scheme allows eligible first home buyers to purchase a property with a deposit of as little as 5%, without the need to pay LMI. Instead, the eligible first home buyer’s home loan (from a participating lender) is guaranteed by the National Housing Finance and Investment Corporation (NHFIC).
There are also a number of other government schemes available to eligible home buyers that may be worth considering.
Another way to avoid paying LMI would be to use a guarantor who would take responsibility for the home loan repayments should you default. A guarantor could be a parent or other family member, who use the equity in their own property to guarantee your loan.
Planning, research and shopping around are the key to understanding your total home loan costs.