Understanding Lenders Mortgage Insurance (LMI) and How to Avoid It
- Liem Ngo
- Nov 27, 2024
- 2 min read
Lenders Mortgage Insurance (LMI) is a crucial topic for first-home buyers and property investors alike. While it helps buyers with smaller deposits access the property market sooner, understanding how LMI works and strategies to avoid LMI can lead to significant cost savings.
What is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is a one-time premium designed to protect lenders if a borrower defaults on their home loan. It is usually required when the Loan-to-Value Ratio (LVR) exceeds 80%, meaning the buyer has a deposit of less than 20%.
Key Points About LMI:
LMI protects the lender, not the borrower, in case of default.
The cost depends on the loan amount, deposit size, and lender’s policy.
Borrowers can pay it upfront or add it to the loan (capitalized).
Why Do Lenders Require LMI?
LMI allows lenders to reduce risk when approving high-LVR loans. This policy benefits borrowers with smaller deposits, enabling them to enter the property market without needing a 20% deposit.
How is LMI Calculated?
The cost of LMI is based on several factors:
Loan Amount: Larger loans result in higher premiums.
Deposit Size: Smaller deposits lead to higher LMI costs.
Lender’s Policy: Each lender partners with specific insurers, so premiums vary.
How to Avoid LMI
Avoiding LMI is a smart financial strategy. Here’s how you can save on this cost:
Save a 20% Deposit
The simplest way to avoid LMI is to save at least 20% of the property value. For a $500,000 property, this means a deposit of $100,000.
Use a Guarantor
A guarantor, often a family member, can secure part of the loan with their property. This lowers the LVR and eliminates LMI.
Benefits: Faster market entry without a 20% deposit.
Risks: The guarantor’s property is at risk if you default.
First Home Guarantee (FHG)
Eligible first-home buyers can avoid LMI with as little as a 5% deposit through this government program.
Leverage Professional Packages
Some lenders waive LMI for professionals such as doctors, lawyers, or accountants, even with smaller deposits.
Opt for Additional Funding Sources
Boost your deposit with gifted funds, equity from another property, or savings.
Buy Below 80% LVR
Choosing a property that allows you to borrow less than 80% of its value can avoid LMI, even without a large deposit.
Benefits of Avoiding LMI
Significant Savings: LMI premiums can be costly, and avoiding them reduces the financial burden.
Lower Loan Balance: Skipping LMI means borrowing less and paying less interest over time.
When Paying LMI May Be Worth It
In some cases, paying LMI is a practical choice:
Quicker Market Entry: Rising property prices might outpace your savings, making LMI a reasonable trade-off.
Strong Income, Limited Savings: If you can comfortably repay a loan but lack a large deposit, LMI could be worthwhile.
Understanding Lenders Mortgage Insurance (LMI) is essential for anyone entering the property market. By exploring ways to avoid LMI such as saving a larger deposit, using a guarantor, or accessing government schemes you can save money and optimize your home loan experience.
Need tailored advice? Contact us today to learn how to navigate LMI and maximize your borrowing capacity.
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