If you've been looking into buying a home, then you've probably heard of Lenders Mortgage Insurance.
Lender's Mortgage Insurance (LMI) is a single one-off premium that's payable whenever you take out a mortgage with a small down-payment on the home. This protects the bank against any losses that it may incur if you can't repay your home loan according to the terms of your mortgage.
Crucially, LMI is not the same as loan protection insurance. LMI covers the bank if you're not able to pay your loan, while loan protection insurance is designed to help you if you can't make payments because of an inability to work.
Who Needs Lender's Mortgage Insurance?
LMI is required for anyone who has an increased level of risk associated with their loan. Typically, this applies to people with a poor credit rating or those who can't pay 20% or more on a deposit for their property.
The premium for your LMI will depend on the size of the deposit that you have, and the value of the property you're buying. The circumstances of your loan will also determine whether you need to apply LMI or not. You can discuss your options with your mortgage lender if they suggest that LMI is necessary.
Once you have LMI, it's added to the total cost of your loan, increasing the amount you pay on your mortgage per month.
How to Avoid Lender's Mortgage Insurance
The easiest way to avoid lender's mortgage insurance is to have a deposit of at least 20% for your property. This will help the bank to see you as a low-risk lender.
You can also consider other options, like asking your parents to act as a guarantor on your home loan. Guarantors are people that agree to take responsibility for paying your mortgage if you can't make your monthly repayments. Of course, this does put your parents on the hook if anything goes wrong.
There's also a chance that you can reduce your risk of needing to take out LMI if you have a particular profession. Certain people like doctors, vets, pharmacists, lawyers, accountants and more can get discounted home loans with reduced interest rates, and even waived LMI. This is because these professionals are considered to be low-risk borrowers. Other professions that receive discounts include:
- Mining engineers
Can You Reduce LMI?
If you don't have the option to waive LMI entirely, then you can always look for ways to reduce your payments. For instance, people buying their first home can potentially get a 15% discount on their LMI. Your home will need to be worth less than $600,000 to apply for this discount.
You can also look into buying a cheaper property, as this will reduce your costs significantly. The higher the price of your loan, the more of a risk you become, and the more your mortgage insurer will charge. Other options you can consider to reduce your LMI include:
- Saving a more significant deposit: Even 10% is better than 5%, and so on
- Choosing the right lender: The premium you have to pay will depend on the lender you go with. Different lenders are backed by different insurers, after all.
- Talking to a broker: Brokers can help you to find the best deal on your home loan, including looking for a lower LMI