What is LMI and how to avoid paying LMI while buying a new home.

Understanding LMI is crucial for aspiring homeowners, as it can significantly impact your mortgage repayments. This blog will help you attain better understanding about LMI in detail.

What is LMI?

LMI is an insurance policy that needs to be paid if your deposit amount is less than 20% of the property value (lender assessed value). 

Borrowers who have a LVR(loan-to-value ratio) higher than 80% are usually considered a higher risk by the banks. By paying LMI, these borrowers with smaller deposits are able to secure a loan to buy their new home.

This helps property buyers to enter the market sooner. But it’s important to also understand the drawbacks. 

LMI can add a significant amount to your mortgage repayments over the loan period, potentially costing you thousands of dollars. Additionally, it offers no benefits or protection to the borrower, making it an expense that many would prefer to avoid.

Is LMI Paid monthly or upfront?

Borrowers can pay their LMI either as on one-off fee during the time of loan settlement, or they could capitalize LMI and pay the premium amount on a monthly basis. 

For example, you have borrowed a loan of $600,000, the LMI premium would cost you around $16,400. In this case, if the LMI is paid upfront, it would be deducted in your loan amount and you can only borrow $583,600.

If you wish to capitalize your LMI, then you would be able to borrow the full loan amount and the additional cost of the LMI Premium will be added to your monthly mortgage. 

It is important to understand that when LMI is capitalized, your monthly home loan repayment amount because the interest calculation will be for the amount inclusion of both the loan amount and the LMI premium.

so when you capitalize LMI (Lenders Mortgage Insurance), it’s important to demonstrate that you are able to pay the loan repayments, including the capitalized premium. 

Who benefits from LMI? 

Lenders Mortgage Insurance is a Insurance policy that protects the lender and not the borrower. 

If a borrower fails to make loan payments and the property is sold for less than the remaining loan amount, LMI solely covers the lender. Eventhough the lender typically passes on the cost of LMI to the borrower, only the lender can claim under the LMI policy, not the borrower or any guarantor. 

It should not be confused with mortgage protection insurance, which borrowers might choose to obtain, to safeguard themselves from the risk of being unable to meet their loan payments.

How much does LMI costs?

The cost of LMI varies depending on few factors such as, the loan amount, LVR (loan-to-value ratio), the type of property bring purchased, and the lender’s LMI provider.

The premium can also differ based on the source of your contribution. If your down payment consists of genuine savings, the LMI premium may differ from when the funds come from other sources, such as a gift.

How to avoid paying LMI?

There are some conventional ways to avoid paying LMI while buying a new home. But they might be not a suitable case for majority of the people.

Some of the ways to avoid LMI are:

  • Save up for the Initial deposit:

    This statement is self explanatory, its the basic way to avoid paying a LMI on your home loan. Save for the Initial deposit, which is 20% of the property value.

    But one major drawback of this option is that it takes 10+ years for an average earning person to save up for a 20% deposit. A data report by ANZ and CoreLogics found out that the median deposit amount to buy a property in Australia has have soared to a staggering $147,795 for both houses and units combined.

    This makes it crucial for an aspiring home buyer to secure a loan with a low deposit. Thats where 0Deposit is helping people. Through this unique oppurtunity, you can move in to your new home with $0 deposit. And an addon benefit to this scheme is that you don’t have to pay a LMI premium for your property. 

    If you are interested to know more about this program, do a quick check on your eligibility for the program. 

  • Get a Guarantor for your loan

    If you have a good guarantor to backup your loan application, you might be able to secure a loan in few banks. 

    A Guarantor is your immediate family member who uses the equity on their home to secure a home loan for you. The equity should be large enough to cover the 20% of your new property value, which is basically similar to avoiding LMI using large deposit. 

  • Search and compare the lenders

    Your new home hunt could be beneficiary if you also search for all the lenders available and compare them based on what they offer. 

    Different lenders have different policies, where some might provide you discount and some would waive off LMI for certain period of the home loan. so it is important to understand and do your research properly. 

  • Use any Government scheme if applicable

    Research about the schemes provided by the government. The Australian government supports eligible buyers to get their new home sooner by initiatives like Home Guarantee Scheme(HGS) .

    Depending on the state and city you live in, there are schemes that you might have to check and apply if you are eligible.