One of the hot topics that our clients want to discuss when speaking with us about their home loan is Lenders Mortgage Insurance. (Commonly referred to as LMI)
Most of our clients are looking for ways to avoid having to pay LMI, so we thought we would share with you some insights into how you can avoid paying LMI.
Lenders Mortgage Insurance can be a very necessary cost of purchasing your home and living out your dream of home ownership. This is especially true for prospective first home buyers struggling to get on the property ladder and for those that have not yet had time to save for their home deposit.
Another side of the property equation that needs to be considered is the cost of not entering the property market right now. As rental prices generally surge alongside property prices, in some cases we have seen that it is cheaper to pay off your own home rather than renting and paying off someone else’s.
Also, if you are looking to purchase a home in a rising property market, making the decision to try and save your deposit week on week could see house prices rise far above the amount that you could have paid for LMI in the first place.
In general, we are great payers (of our commitments) but not great savers. If you do not have a family member who can help with a deposit or gift contribution, LMI becomes a genuine consideration and unavoidable cost of purchasing a home.
But do not stress, this is normal for most Australians.
Here is a list of things to consider when trying to avoid having to pay Lender’s Mortgage Insurance.
It goes without saying that the best way to avoid paying lender’s mortgage insurance is to have a lower than 80% loan to value ratio. If you already have a property that holds the necessary equity, you could utilize this equity to raise the 20% deposit required for your new purchase. Speak with us about how we can structure your loans to make this work for you.
If you cannot pay LMI, or want to avoid it, then we can also help you look to see if you qualify for the First Home Loan Deposit Scheme. If you, or you and your partner, are both Australian citizens, you can buy your first property with just 5% deposit and zero LMI, courtesy of the Federal Government.
Timing is everything with Government Grants and they do not last forever, so if you are thinking that this might be an option for you, act now to avoid disappointment. Places in this scheme are limited to just 10,000 places per year, and there is a process to ensure that you qualify.
Have a chat to one of our Home Loan Lending Specialists to see if you qualify before you enter the loan application process.
Some banks and lenders may offer an LMI waiver, if you earn a high salary and you have a solid employment history working as a professional in specific industries. Some professionals who may qualify for LMI waivers include Doctors and other medical professionals, Accountants, Actuaries and Solicitors to name a few.
The good news is that if you work within one of these ‘low risk’ professions, then you might well be able to have the LMI waived and only have to produce 5% deposit.
Leveraging off your Mum and Dad’s great credit profile and the equity in the family home might be a great option to help you get onto the property ladder, via a guarantor loan that utilizes the equity built into their family home. There are some special conditions that apply to this style of lending, so please reach out to us for more information.
Can your parents help you with a ‘gift’ loan deposit?
Ultimately, it could make financial sense for you to get part of your inheritance now and invest it into a property that will accumulate value over time rather than your parents only passing on your inheritance when they are no longer here to see you enjoy it.
Not all lenders are created equal when LMI is concerned. There are options out there to avoid lender’s mortgage insurance through banks and non-banks that simply do not ask for it.
Finding a lender that will offer you a no LMI offer can reduce the required deposit by 5%. That is a significant saving. Some of these lenders are even backed by major banks, which means that they are safe to use and will be around long term.
Here at Fox Home Loans, it is our job to be across which lenders are offering our clients the best loan deals. Some of these are new digital banks that will consider a higher loan to value ratio (LVR) over other traditional lenders. Speak with us to learn more about this option.
If you want to get on the property ladder sooner and you don’t have a 20% deposit on your own, you could partner with a sibling or friend and buy the property as a joint venture. This way you both contribute to the deposit, and you lower your risks and financial obligations.
Example of Deposit and Fees
When we speak with some of our clients, they have not yet considered that the deposit that they put down on a property covers their fees and charges as well. It is important to note that with most home loans, there are upfront fees and charges i.e., estimated bank fees/ conveyancer fees, stamp duty and Govt. transfer fees.
See below for the 3 most common scenarios that we see and what the fees and charges could be. These examples are based on someone buying a property for $500 000.00.
1. Scenario 1: Client has 20% deposit which means the client would avoid the need to pay for Lender Mortgage Insurance – LMI.
2. Scenario 2: Client has 5% deposit which means they will likely be required to pay LMI (in this example it would calculate to be $17,182).
3. Scenario 3: Client has 5% and would like to capitalize the LMI (add the LMI on to the mortgage. Now the loan would be 492k opposed to Option 2 that’s 475k which will mean the LVR would increase to 98.44%. Some lenders still accept this however, the Lender options are limited, and rates are normally a little higher due to the higher risk associated for them as the LVR is much higher.
Purchase price for the below example is $500k and 20% of that is 100k but if you look at the above “suggested deposit” it works out to be $113,125 opposed to the 100k you may think.
When going through the scenario with the clients, we point this ”suggested deposit” out to clients as it covers all the fees and charges.
Please note that the figures we have represented in this article are only indicative at time of writing and do not take into account your individual circumstances, plus they are subject to change.
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