Whether you’re a first home buyer or taking another spin in Australia’s housing market, you might be interested to know that it’s possible to purchase property even if you don’t have the typical 20% deposit – as long as you pay for lenders mortgage insurance (LMI).
LMI protects your lender’s investment in case you default on your home loan. It also covers the lender’s losses in the event of a shortfall, in which “the proceeds from the sale of your home are not enough to cover the outstanding amount you owe to your lender,” says ANZ Banking.
As such, LMI can help borrowers buy their dream home with minimal savings for loan security – but it also offers no protection to home buyers. In fact, it may even be an added financial burden to individuals with limited budgets.
But did you know that you can reduce your LMI costs or even avoid paying it entirely?
Here are vital things you should learn about lenders mortgage insurance and seven ways to waive or lower its costs.
How much is lenders mortgage insurance in Australia?
There is no single answer to this question since LMI depends on your lender, the total loan amount, and the loan to value ratio (LVR), according to CommBank.
Your LVR refers to the ratio between the total property value as estimated by your lender and the size of your loan. For example, having a $50,000 deposit for a $500,000 home means you are borrowing $450,000. These figures result in an LVR of 90%.
As a very rough guide, you can expect to pay a lenders insurance premium between $8,000 and $10,000 for the example above – and it could be cheaper by around $1,000 if you are a first home buyer.
To help you estimate the total cost of your home loan, you should use a lenders insurance calculator. Additionally, LMI premiums can be paid as a one-off payment during settlement, or you can choose to add it to your monthly mortgage repayments and pay it gradually.
However, choosing the latter will make the premium accrue interest and become more expensive in the long run. That’s why you should consider the following options when applying for a home loan.
1. Leverage your current employment and income
Some banks and non-bank lenders may offer waivers depending on your job and income level. They may consider you as a low risk borrower if you earn a high salary in specific industries.
For insurance, medical professionals, barristers, and accountants in Australia may qualify for flexible home loan options and lenders mortgage insurance waivers. Eligible jobs include mining specialists, entertainment professionals, and athletes with an accredited agent or manager.
To qualify for an LMI waiver, borrowers are usually required to submit proof of affiliation to reputed industry associations.
However, you should note that “LMI waivers do not cancel out the initial deposit requirement, and you may still need to put down 10% of your home’s value,” says finance company RateCity. “Consider checking if lenders have other industry-specific requirements for LMI waivers.”
2. Qualify for the First Home Loan Deposit Scheme (FHLDS)
The FHLDS is a federal initiative that allows first home buyers to purchase a property with a deposit as low as 5% of the total loan value without paying for LMI. This program is administered by the National Housing Finance and Investment Corporation (NHFIC).
Under the scheme, the NHFIC guarantees part of a qualified home buyer’s loan from a participating lender. However, there are strict eligibility criteria that you must satisfy.
First, you need to be an Australian citizen who must not have owned an owner occupied or investment property in the country.
Second, the applicant’s income for the previous financial year should not exceed $125,000 for individuals or $200,000 for married couples or people in a de facto relationship.
And finally, the value of your prospective home must fall within the property price threshold as set by NHFIC. The price cap may vary depending on your home state or territory.
3. Get a guarantor home loan
If you do not qualify as a first home buyer, you can eliminate your LMI costs by getting a guarantor – and you may not need to pay a deposit at all in some cases.
A guarantor home loan allows close family members to use the equity in their own home as security for a portion of your mortgage. If the guaranteed amount reaches or exceeds 20% of the total purchase price, you no longer have to pay for mortgage insurance.
For example, you want to buy a home costing $400,000 and you have saved a deposit of only $40,000 or 10%. Under a conventional home loan, you need to pay around $7,000 for LMI.
If an eligible guarantor offers $40,000 of their home equity as extra security for your mortgage, you will reach the 20% minimum deposit requirement to waive the insurance.
Additionally, your guarantor does not need to provide cash upon the loan’s settlement but the lender will turn to them when you fail to keep up with regular repayments.
4. Try to save as much security deposit as possible – even if it doesn’t reach 20%
Achieving an LVR of 80% means that you don’t have to pay for LMI so it’s still the most straightforward way to avoid paying for mortgage insurance.
However, saving up to a 20% deposit may not be easy for everyone. If you think you can’t build enough funds within a reasonable timeframe, try to get as close as you can and consider finding a more lenient lender.
For instance, UBank has recently announced that it will grant an owner occupier home loan without LMI to eligible borrowers if they have deposited at least 15%.
“LMI can add tens of thousands of dollars to a loan and months of additional savings time,” says UBank. “Now, an average loan of $480 000 with an 85% LVR, owner occupier customers will only need a 15% deposit, instead of 20% and will save approximately $5,000 on insurance.”
You can also find non-major financial institutions in your home area with similar policies. A case in point is St. George Bank in Sydney that charges $1 LMI for eligible home buyers with LVRs of up to 85%.
5. Form a shared equity agreement (SEA)
Although getting a SEA in Australia is rare, it is a viable option for home buyers to reduce their mortgage insurance costs.
The first step is to ask your lender if they allow this arrangement. If yes, then you should find a third party to contribute a portion of the property cost to reduce your LVR to 80% or lower.
Also called your equity partner, permissible third parties include family members, another lender, non-profits, or a government organisation, according to fintech company Finder.
Afterward, you have to apply for a regular mortgage to cover the remaining purchase costs beyond the joint deposit from you and your equity partner. In some cases, the SEA allows the home buyer to gradually pay the contributor’s cost over the life of the loan.
When you sell the property, you have to repay the contribution of your partner and give them a proportionate amount of equity.
Also read: How mortgage brokers help first home buyers
6. Apply for a substitution of security
This applies only to individuals who are looking to buy a new property and sell an existing one at the same time.
“Instead of taking out a new loan and closing your current loan, substitution of security (sometimes known as loan portability) may help you swap the security on your current loan from the property you’ve sold to the one you’re purchasing,” says CommBank.
Getting a substitution of security may vary depending on the prices of the old and new property. For example, if the LVR and loan amount remain the same or decrease, no fee or additional LMI premium will apply.
On the other hand, getting a property with a higher LVR or loan amount means that a new LMI premium will be payable.
These guidelines are based on the underwriting handbook of Genworth, one of the largest mortgage insurance providers in Australia. The policies may vary depending on the lender and its respective LMI provider.
7. Find a cheaper property or get a mortgage broker
Ultimately, the LMI price is directly proportional to a property’s sale value. It can go a long way for your pockets to perform extensive research and find a home that matches your needs and financial circumstances.
You may also consider working with a mortgage broker, especially if you find it cumbersome or confusing to learn about various home loan requirements and eligibility criteria for federal initiatives like the FHLDS.
These mortgage professionals provide financial advice to people who are planning to buy a home. Furthermore, they can match you with a lender or loan product that best suits you.
Collections: Mortgage News