You might qualify for a LMI waiver - but you'll have to be a doctor or an accountant

Lender’s Mortgage Insurance (LMI) is one of the biggest upfront costs of a home loan, so seeing it waived would offer a lot of relief to home buyers. In Australia, some professionals can qualify to have LMI waived – but they may not be the borrowers you expect.

LMI isn’t small change. While it can easily run into the tens of thousands of dollars, every cent of it goes towards protecting the bank, not you. Unsurprisingly, a lot of borrowers on tight budgets and limited deposits don’t have a spare ten or twenty thousand at the ready for this extra cost, and end up rolling this cost into their mortgage to get it over the line.

While this strategy can help buyers enter the market sooner, it can also end up being a costly exercise, which has the capacity to limit your options in the years to come.

Who can qualify for a LMI waiver?

RateCity research shows that the following major banks and lenders offer a LMI waiver for medical and legal professionals.

*includes St George, Bank of Melbourne, BankSA

Source: RateCity.com.au. Data accurate as of 06/10/22.

How do banks determine who qualifies for waived LMI?

For many home loan lenders, it comes down to risk. Borrowers with small deposits don’t have a buffer to fall back on when things don’t go to plan. As a result, they’re seen as high risk, prompting the bank to take out extra insurance against the risk of them defaulting.

However, some lenders are happy to hand out a pass to people with professions that are more likely to be retained in steady jobs, on good incomes, come what may. Let’s not forget, many of these customers have a goodchance of becoming a high-net worth customer that could be a lucrative income source for the bank.

What should professionals consider when taking out a waived LMI home loan?

It’s important to keep in mind that deals like these incur their own benefits and risks, and it’s important to know how much it could cost you in the long run.

Buying in a falling property market with a small deposit can be risky, so know what you’re up against before you jump in. While the long-term trajectory for the property market has historically been up, in the short term, the market has been experiencing a downturn.

Home buyers with a small deposit entering in a falling property market could find they end up with little, or no, equity in their loan within months. Being in negative equity isn’t a life sentence, but if you have plans to refinance your home loan, it can mean you’re stuck with your current lender. You’ll be locked into your potentially non-competitive interest rate with limited options for change.

Further, while the bank might be willing to waive LMI for ‘low risk’ professions, they can still charge these borrowers higher interest rates for having a wafer-thin deposit. While this might seem like a small price to pay to duck LMI, a higher interest rate has the capacity to cause significant financial pain over the longer term, particularly if you end up stuck in mortgage prison with limited avenues out.

For example, CBA’s lowest variable rate for owner-occupiers paying principal and interest with a 20% deposit was 4.29% at the time of writing. However, the rate on this loan increases to 5.14% for people with smaller deposits.

Someone buying a $1 million property with a 10% deposit, taking out CBA’s lowest variable rate loan, could pay $253,358 extra in interest over the life of the loan, compared to someone buying the same property with a 20% deposit.

Keep in mind that the interest rate you are offered often comes down to individual circumstances and priorities. And while you may end up paying more interest over time, if it means getting the house of your dreams, you might decide it’s worth it. The key is to understand the implications of each option so you can make an informed decision.

Compare home loans in Australia