Lenders Mortgage Insurance (LMI) is a one-time, non-refundable fee that borrowers in Australia might have to pay when acquiring property. It serves as a safety net for the lender in case the borrower defaults on the mortgage.
For many prospective homeowners, LMI can add a significant cost to the home buying process. In this article, we’ll explore strategies to avoid paying LMI in Australia.
Understanding LMI
Before diving into how to avoid LMI, it’s vital to understand what it is and when it’s applied. Generally, if you’re borrowing more than 80% of the property’s value the lender may require LMI to offset the risk. Each lender has different products with varying terms that may affect if you need to pay LMI. I will go over these in more detail below.
Often clients of mine and the general public have been confused about which party this insurance protects. It only protects the lender in the case someone defaults on their repayments but is paid commonly by the borrower.
Save for a Larger Deposit
The most straightforward way to avoid LMI is by saving a deposit of at least 20% of the property’s purchase price. Saving for this amount of deposit is challenging for some, which is why budgeting is important.
Tips for Saving:
- Budgeting: Outline your monthly expenses and identify areas where you can cut back. Doing it once provides you with a great overview of your previous spending, while continuously keeping track can help you maintain the saving goals set.
- High-Interest Savings Account: Utilize an account that provides good interest on your savings. When putting away saved money for specific periods of time, these are seen commonly as low-risk investments.
- Government Schemes: Schemes available for first time homeowners like the First Home Super Saver Scheme (FHSS). Check with your mortgage broker to see what government schemes and grants may be available to you.
Consider Family Guarantees
Some lenders allow immediate family members (usually parents) to use their property as security for your loan. This method can sometimes eliminate the need for LMI, as the lender has additional collateral.
Things to Consider:
- Legal Advice: Both parties should seek legal advice to understand the responsibilities and potential risks involved.
- Relationship Dynamics: Be clear about expectations and responsibilities to prevent future misunderstandings or disputes.
Explore Professional Packages
Certain professionals like doctors, lawyers, and accountants may be eligible for LMI waivers or discounts due to their generally stable and high-income employment. Each lender has different criteria, so it’s worth investigating if your profession qualifies.
Negotiate with the Lender
In some cases, lenders may be willing to waive or reduce LMI if you present a strong case, such as:
- Stable Employment: Proof of a stable income and job security.
- Good Credit History: A clean record of managing debts responsibly.
- Other Assets: Having other assets might reduce the lender’s perceived risk.
- Promotions: The lender may have a promotion running changing the requirement for LMI.
Opt for a Smaller Loan
Consider properties within your budget that would enable you to borrow at or less than 80% of the property’s value. While this might limit your options, it ensures that you won’t be subject to LMI.
Viewing properties at different price tags will give you a good idea of the difference in what getting a smaller loan could do for you. Not only could you find the property that you love, but you may be paying less due to the overall size of the loan or the interest rate.
Use a Mortgage Broker
A mortgage broker can help you navigate the complexity of different loan products and assist you in finding a lender’s product that suits your needs. This could save you time and stress knowing that you’re being looked after.
Contact us at Read Finance for a complimentary meeting to see how we can help you with your property finance.
Conclusion
Avoiding LMI in Australia could require careful planning, financial discipline, and a thorough understanding of the options available. By saving a larger deposit, considering family guarantees, exploring professional packages, negotiating with lenders, opting for a smaller loan, or using a mortgage broker, you can strategically reduce or eliminate the cost of LMI.
By following these principles and seeking professional guidance, the path to homeownership in Australia could become more affordable and within reach, without the burden of Lenders Mortgage Insurance.
