Purchasing a home is an exciting milestone in life, but for many Australians, the burden of Lenders Mortgage Insurance (LMI) can be a significant hurdle. Lenders mortgage insurance (LMI) is required when the value of a loan is more than 80% of a property’s purchase price or property valuation if refinancing.
However, with careful planning and understanding of the Australian property market, you can take steps to avoid or minimize LMI. In this blog, we will explore strategies and tips to help you navigate the home buying process in Australia without the burden of LMI.
1. Save for a Larger Deposit:
The purpose of LMI is to protect lenders should the borrower fail to make loan repayments when the LVR exceeds 80 per cent. When the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk to the lender of not recouping their costs, should the borrower default, is increased. A higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.
2. Explore First Home Buyer Options:
If you are a first-time homebuyer, there are various schemes and grants available in Australia that can assist you in avoiding LMI. For example, the First Home Loan Deposit Scheme and the First Home Owner Grant can provide financial support, allowing you to secure a loan with a smaller deposit and potentially avoid LMI.
3. Consider Family Guarantor Loans:
If you don’t have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor and they use the equity in their residential property to help you secure yours and keep your total loan below 80%. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.
A little insider knowledge from our team may go a long way in helping you to find a loan that won’t require you to fork out for LMI.
4. Look for LMI Waiver Options:
Some lenders offer LMI waiver options, especially for specific professions such as doctors or other high-income earners. These waivers are often provided as an incentive to attract borrowers from such professions. It’s worth researching lenders who offer these waivers and understanding the eligibility criteria.
5. Explore Different Loan Structures:
Another strategy to avoid LMI is by exploring different loan structures. For instance, splitting your loan into two portions, with one portion below 80% LVR (Loan-to-Value Ratio), can help you avoid LMI on that portion. While this may not eliminate LMI entirely, it can significantly reduce the amount payable.
6. Improve Your Credit Score:
Maintaining a good credit score is crucial when applying for a home loan. A higher credit score demonstrates your financial responsibility and reduces the lender’s perceived risk. By paying bills on time, reducing credit card debt, and avoiding unnecessary credit inquiries, you can improve your credit score and negotiate better loan terms, potentially avoiding LMI.
Conclusion on How to Avoid LMI:
Lenders Mortgage Insurance can add a substantial cost to your home loan, but with careful planning and knowledge of the Australian property market, you can take steps to avoid or minimize this expense. By saving for a larger deposit, exploring first home buyer options, considering family guarantor loans, looking for LMI waiver options, exploring different loan structures, and improving your credit score, you can increase your chances of avoiding LMI in Australia. Remember to consult with a professional mortgage broker or financial advisor to determine the best strategy for your specific situation. With perseverance and careful planning, you can turn your dream of homeownership into a reality, free from the burden of LMI.