When you apply for a home loan, the amount of your deposit as a share of your property's overall value determines whether your mortgage provider is going to charge you for lenders' mortgage insurance (LMI).
The cost of LMI could be an added burden for homebuyers whose budgets are limited. While there are ways on how you can avoid paying for LMI, there are also instances where this cost can actually be waived.
Here are the situations where you do not need to pay for LMI:
When you meet the 20% deposit requirement
The most common and sure-fire way for you to dodge paying for LMI is by meeting the 20% deposit requirement by lenders. This means that you only borrow up to 80% of your property's value. This amount is called the loan-to-value ratio.
The LVR determines your risk to the lender as a borrower. If you are planning to take out a loan that is more than 80% of the property's value, banks will require you to pay for LMI. If you are curious about how much LMI costs, you can use this tool.
When you get qualified for the First Home Loan Deposit Scheme
The federal government's First Home Loan Deposit Scheme aims to help first-home buyers overcome the deposit hurdle by guaranteeing up to 75% of the required deposit by banks. This means that you only need to come up with 5% of your property's value for your mortgage down payment.
To be eligible for the scheme, you must have an annual taxable income of no more than $125,000. If you have a spouse, your combined annual income should be less than $200,000 per year.
When you are part of certain professions
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 for the insurance.
Accountants, lawyers, professional athletes, entertainment professionals, and mining specialists can also have LMI waived, as long as their LVRs do not exceed 90%.
Lenders consider borrowers in these professions as low-risk given their income. These borrowers, lenders believe, usually meet their payment deadlines and rarely default on their loans.
When you have a guarantor
If the three instances mentioned above do not apply to you, there is another way for you to avoid paying for LMI — through guarantor loans.
Guarantor loans allow individuals related to you to use the equity in their own property as security for part of your mortgage. This means that your guarantor should own property and is willing to help you secure a mortgage.
Your guarantor should also be able to meet a specific set of criteria on income, home equity, and credit score.
When your lender does not charge LMI
Some lenders have promotional offers for first-time borrowers. For instance, St. George Bank has rolled out a $1 LMI for eligible buyers with LVRs of up to 85%. This offer is available for a maximum loan size of $850,000.
To dive deeper about these strategies to avoid LMI and to know which lenders offer similar promotional packages, reach out to a home loan specialist today.