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How can I avoid paying LMI?

With property prices in Australia continuing to rise, aspiring first home buyers are finding it difficult to save up a deposit large enough to purchase a home.

The alternative is to buy a home with a lower deposit, but potentially pay Lenders Mortgage Insurance (LMI). Here we explain what LMI is and how you can avoid paying it on your home loan.

What is LMI?

LMI stands for Lenders Mortgage Insurance. It’s insurance that covers your lender (not the borrower) in the event that you default on your home loan repayments.

It’s usually charged to borrowers with a Loan to Value Ratio (LVR) of greater than 80%, because lenders deem these borrowers a greater risk. This means you’ll typically need a deposit of at least 20% of the property purchase price to avoid paying LMI.

How is LMI paid?

LMI can be paid as a one-off payment, or it can be capitalised on your loan, meaning the cost of LMI is added onto your loan amount and you pay it back along with your mortgage repayments.

How is LMI calculated?

The cost of LMI varies depending on the size of your loan, the size of your deposit, the purpose of the property (whether it’s to live in or to rent out, for example) and the lender’s insurer. You can get an idea of how much LMI you might need to pay by using our LMI calculator.

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6 ways to avoid paying LMI?

If you want to save on the cost of LMI, these tips could help you avoid paying it altogether.

1. Check your eligibility for a professional home loan

Are you a doctor, dentist, accountant or engineer? You could be eligible for waived LMI on your home loan.

Lenders often provide special discounts and loan conditions for certain professions. This is because these professionals typically earn high incomes and have good employment tenure, meaning lenders view them as being at a low risk of defaulting on a home loan.

While the professions and discounts vary by lender, it is possible for lenders to waive LMI for these borrowers.

2. Compare different lenders

Comparing plenty of lenders in your hunt for a home loan can pay off when it comes to avoiding LMI.

Some lenders will discount or even waive LMI for eligible borrowers – you just have to look around.

For example, some lenders might allow borrowers to avoid LMI with a deposit as low as 15%, rather than 20%.

3. Use a financial gift

If you’re lucky enough to be gifted money, it’s possible to put a financial gift towards your deposit to help you avoid paying LMI.

It’s important that the money is declared as a gift, and that there’s no need for you to pay it back. Also, financial gifts are typically viewed as non-genuine savings by lenders, so you’ll likely need to show you have genuine savings of your own to get your deposit over the line without paying LMI.

4. Get a relative to go guarantor on your loan

A guarantor home loan could be an option if you want to avoid paying LMI.

A guarantor is someone – usually an immediate family member or close relative – who uses the equity in their home to secure your home loan. The equity needs to be enough to cover a 20% deposit if you’re to avoid paying LMI.

It’s important to note that a guarantee is legally binding – if you can’t repay your home loan for any reason, the responsibility will fall onto the guarantor. You can remove a guarantor from your home loan once the value of the guarantee has been paid off.

By using a guarantor, you can obtain a home loan with a smaller deposit and avoid LMI. However, the conditions of a guarantor home loan are strict and it’s best to speak with an expert to make sure this option is right for you.

5. Take advantage of government schemes

If you’re having trouble saving up a deposit that enables you to avoid paying LMI, it’s worth checking your eligibility for government schemes aimed at helping home buyers into the property market.

One of these is the First Home Loan Deposit Scheme, a scheme run by the federal government that helps first home buyers buy a property with a deposit as low as 5% and avoid LMI charges. The National Housing Finance and Investment Corporation guarantees the lender up to 15% of the purchase price of the home.

Other government schemes like the First Home Owners Grant could help boost your deposit over the line, helping you avoid LMI.

6. Save a larger deposit

While this might seem self-explanatory, it’s still worth mentioning. If you want a home loan without paying LMI, your best bet may be to wait until you can grow your deposit to 20%.

Even if you can’t get your deposit to 20%, the higher the deposit the better. For example, 15% is better than 10% when it comes to the cost of LMI, as LMI charges will increase the lower your deposit is.

If you’re looking to buy a home with a low deposit, it can be a good idea to talk to an expert. Book an appointment with a Home Loan Specialist at a time that suits you.

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The information in this post is general in nature and should not be considered personal or financial advice. You should always seek professional advice or assistance before making any financial decisions.

Tags: home loan, new purchase, refinance, lmi (lenders mortgage insurance), first home, first home buyer, low deposit, deposit, loan to valuation ratio, guarantor, genuine savings

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