How to avoid LMI (Lenders Mortgage Insurance)

Lenders Mortgage Insurance (LMI) can be a significant cost when buying a home, as it can add tens of thousands of dollars to the overall cost of purchasing a property. The good news is that there are strategies to avoid paying LMI, which can make buying a home more affordable.

In this article, we’ll cover the key methods you can use to avoid LMI, such as saving for a larger deposit, using a guarantor loan, taking advantage of government schemes, or working in specific industries. While LMI serves a useful purpose in enabling home ownership with a smaller deposit, avoiding it can save you a substantial amount of money in the long term. Let’s explore the ways you can avoid paying LMI and reduce your upfront costs when buying a home.

What is LMI and Why is it Required?

LMI is a form of insurance that protects the lender in case the borrower defaults on their home loan. It’s typically required when a borrower doesn’t have a 20% deposit, which represents a higher risk for the lender. In this case, LMI compensates the lender for the additional risk they are taking by issuing the loan. It’s important to note that LMI is not there to protect the borrower, but rather to provide the lender with peace of mind. As a result, the borrower ends up covering the cost of the insurance premium, which is either paid upfront or added to the total loan amount.

LMI can be expensive, especially for borrowers with smaller deposits. For example, if you’re only able to provide a 10% deposit, you could end up paying thousands in LMI premiums, depending on the size of the loan. While LMI allows buyers to get into the property market sooner with less money upfront, it can significantly increase the overall cost of purchasing a home. That’s why many buyers look for ways to avoid paying LMI altogether.

Save for a 20% Deposit

The most straightforward way to avoid LMI is to save for a 20% deposit. By reaching this deposit threshold, you are no longer considered a high-risk borrower, meaning LMI won’t be required. While saving for a 20% deposit can take longer, it can save you thousands of dollars in insurance premiums, which may be worth the wait. A larger deposit also means you’ll be borrowing less, which can lower your monthly mortgage repayments and reduce the amount of interest you pay over the life of the loan.

Saving for a bigger deposit requires discipline and careful financial planning. Strategies such as creating a strict budget, reducing unnecessary expenses, and setting up automated savings can help you reach your goal faster. While it may take longer to save up, avoiding LMI can significantly reduce your upfront and ongoing costs, making home ownership more affordable in the long run.

Use a Guarantor Loan

A guarantor loan is another way to avoid paying LMI. With a guarantor loan, a family member (usually a parent) agrees to use their property as additional security for your loan. This provides the lender with enough security to approve the loan without requiring you to pay LMI. Essentially, the guarantor’s property acts as collateral, which reduces the lender’s risk and eliminates the need for LMI, even without a 20% deposit.

While using a guarantor can help you avoid LMI, there are risks involved. If you default on the loan, your guarantor’s property could be at risk of foreclosure, which can strain family relationships. It’s important to have a clear understanding of the responsibilities and potential financial consequences for both you and your guarantor before proceeding with this option. That said, many Australian families find this to be an effective way to enter the property market sooner without the added cost of LMI.

First Home Buyer Schemes

Several government schemes are available to help first-time buyers avoid LMI. For example, the First Home Guarantee (FHG) allows eligible first-home buyers to purchase a property with a deposit as low as 5% without paying LMI. The government acts as the guarantor for the loan, reducing the lender’s risk and allowing buyers to enter the market sooner. These programs are extremely helpful for first-time buyers struggling to save for a 20% deposit.

However, these schemes typically have eligibility criteria, such as income limits and property value caps. Additionally, the number of places available each year is limited, so it’s important to apply early if you’re interested. While government schemes can be a great way to avoid LMI, they may not be available to everyone, so it’s essential to explore all your options.

Professional or Industry-Based LMI Exemptions

Certain professions, such as doctors, nurses, lawyers, teachers and accountants, may be eligible for LMI exemptions or discounts. Lenders consider these professionals to be low-risk borrowers due to their stable income and high earning potential, so they may offer LMI waivers with as little as 5% deposit. This is an excellent option for eligible borrowers, particularly those who have high future earning potential, but haven't saved enough for a 20% deposit yet.

To qualify for these exemptions, you’ll need to provide evidence of your profession and meet the lender’s criteria. Read this article to see which professions and industries are eligible for the LMI waiver, and find out which banks offer these exemptions. It's a good idea to speak to a mortgage broker like EE Mortgages who has access to all the lenders with exemptions, and can guide you through the process on how to avoid LMI.

Negotiate with the Lender

In some cases, you may be able to negotiate with the lender to avoid LMI, especially if you have a strong financial profile. Lenders may be willing to waive or reduce LMI if you can demonstrate stable employment, a high income, and a good credit history. By reducing the lender’s perceived risk, you may be able to negotiate a higher loan-to-value ratio (LVR) without needing LMI.

However, negotiating LMI can be tricky, and it’s not always guaranteed. Lenders have strict policies around when LMI is required, but if you present yourself as a low-risk borrower, they may offer more favourable terms. It’s always worth discussing your options with a mortgage broker who can negotiate with the lenders on your behalf.

Use Lender Promotions and Discounts

From time to time, lenders may offer promotions or discounts that allow borrowers to avoid or reduce LMI. These promotions are often designed to attract first-home buyers or high-quality borrowers and may include waivers or reduced LMI premiums for eligible customers. It’s worth shopping around and comparing different lenders to see if any promotions are available that could help you save on LMI costs.

However, it’s important to be cautious when taking advantage of lender promotions, as there may be conditions attached. For example, the interest rate on the loan may be higher, or the promotion may only apply to certain loan types. Always read the fine print and compare the total cost of the loan to ensure you’re getting a good deal.

Conclusion

Avoiding LMI can save you thousands of dollars when purchasing a home, and there are several strategies you can use to achieve this. Whether it’s saving for a 20% deposit, using a guarantor loan, or taking advantage of first-home buyer schemes, there are plenty of options available. Additionally, professional exemptions and lender promotions can provide further opportunities to avoid LMI costs.

Careful financial planning and using a mortgage broker to explore all available options can help you avoid LMI and reduce the upfront costs of buying a home. Speak to an experienced mortgage broker from EE Mortgages today and get started on your journey of buying a home. Our services are 100% free of charge (we are paid a commission by the lender), and we have helped thousands of Australians over the years.