When you apply for a home loan, the deposit you provide as a percentage of the value of the property will determine whether or not you need to pay lenders' mortgage insurance (LMI).
The cost of LMI can end up being another expense to pile onto the already long list when buying a home, and many homeowners on a budget are looking for ways to reduce or eliminate this cost.
Below are some of the situations in which you don’t need to pay LMI, as well as some ways to get out of needing to pay this extra cost.
- Have a 20% deposit
- Qualify for the First Home Loan Deposit Scheme
- Employment in certain professions
- Consider a guarantor
- How to avoid being charged LMI
The most common way people avoid paying LMI is by meeting the 20% deposit requirement set by lenders. This means you only borrow 80% of the property’s value, which can be expressed by the loan-to-value ratio (LVR).
The LVR is used to determine your risk as a borrower. Taking out a home loan for more than 80% of what the property is valued means that you will need to pay LMI. This is because you are considered a ‘higher risk’ to the lender, as you will need to borrow more money
The First Home Loan Deposit Scheme is backed by the Federal Government, which aims to help first-home buyers secure their first property by guaranteeing up to 75% of the required deposit. This means you’d only need to put down a 5% deposit from your own cash to secure the home.
Banks and lenders usually waive LMI for borrowers in certain professions. For instance, medical professionals, including doctors, optometrists, veterinarians, and dentists, can borrow up to 100% of their property's value without paying LMI.
Accountants, lawyers, professional athletes, entertainment professionals, and mining specialists also don’t need to pay LMI as long as their LVRs don’t exceed 90%.
Lenders consider borrowers in these professions as low-risk given their income. Lenders believe that these borrowers usually meet their repayment deadlines and rarely default on their loans.
If none of the above applies to you, there is another pay to avoid paying LMI - getting a guarantor loan.
A guarantor loan allows a person that’s related to you to essentially secure the entire loan or a portion of it. Meaning if you were unable to make your loan repayments, the responsibility would fall back onto the guarantor. You can borrow 100% of the property’s value with a guarantor loan, or sometimes, even slightly more than that.
If you opt for a guarantor loan, your guarantor will need to meet specific income, home equity, and credit score criteria. They should also understand the risks involved by agreeing to be a guarantor because if anything goes wrong, they will be liable for the amount they guarantee.
There are still some other ways to avoid being charged LMI if the other options don’t suit you. Some lenders will come out with promotional offers for first-time borrowers, so it’s always a good idea to keep an eye out for these deals.
Some other options to consider could include:
Form a shared equity agreement (SEA): Though rare in Australia, looking into an SEA could reduce your LVR to 80% or lower. You’ll need to find a third party to contribute to a portion of the property cost and then apply for a regular mortgage to cover the remaining purchase costs.
Apply for substitution of security: While this only applies to people looking to buy a new property and sell an existing one at the same time, getting a substitution of security can help you swap the security on your current loan to the home you’re purchasing.
Find a cheaper property or get a mortgage broker: If there is no way for you to avoid LMI with the property you’re looking to purchase, you might want to consider finding a more affordable property that is within your budget. Alternatively, you could work with a mortgage broker to learn more about how to avoid LMI, as well as get general financial advice about buying a home.