As a first home buyer on the Gold Coast, you may have heard that you need to save a 20% deposit before you can apply for a home loan. Otherwise, you’ll have to pay… Lenders Mortgage Insurance!
And let’s face it, none of us like having to pay extra for stuff. But on the flip side, how long will it take you to save that 20% deposit? And do you really want to continue living in a share house/old rental/your parents’ spare room for that long?
According to data from the Reserve Bank of Australia, around 25% of home loans have Lenders Mortgage Insurance. Despite this, almost half of all surveyed Australian millennials in a separate study (42.1%) do not understand it, and 8.2% of respondents thought the LMI premium protects the borrower (which is clearly not the case…).
So, what exactly is Lenders Mortgage Insurance? Is it something to be feared and avoided at all costs? Or could it help you buy your first home a lot sooner?
Understanding Lenders Mortgage Insurance
What is LMI?
Often referred to by the acronym LMI, Lenders Mortgage Insurance is an Australian insurance policy that is paid for by the borrower. It’s designed to provide the lender with additional security in case the borrower ceases being able to service their repayments. Yes, you read that right: It protects the lender, not the borrower (something which comes as a shock to many, who may be confusing LMI with ‘mortgage protection insurance Australia’).
How does LMI work?
When a borrower applies for a home loan, the lender will assess their risk level based on factors such as their credit score, employment status, income, and the size of their deposit. If the borrower has a smaller deposit (usually less than 20% of the purchase price of the property), the lender may require them to pay lenders mortgage insurance as a condition of the loan.
The cost of LMI is calculated based on the size of the loan and the size of the deposit. The smaller the deposit, the higher the LMI premium will be. LMI is a one-time payment that is typically added to the loan amount and paid off over the life of the loan.
While the lenders mortgage insurance protects the lender, it does not protect the borrower. If the borrowers stop paying their repayments and default on their mortgage and the lender makes a claim on the LMI policy, the borrowers will still be responsible for any shortfall between the amount owed and the amount recovered from the sale of the property.
Why does the lender need protection?
Lenders are all about assessing risk. Anything too high risk makes them (understandably) very uncomfortable. If a borrower has a 20% deposit, it means the lender is only risking 80% of the property value (known as the Loan-to-Value Ratio, or LVR). If the borrower defaults on their loan, the lender should easily be able to sell the property to recoup their full costs.
But if the borrower only has a 10% deposit, then the LVR is 90% – a much higher risk proposition for a lender. If property prices decline and the lender can’t sell the property for at least 90% of the original purchase price, they’ll lose money. To prevent that from happening, most lenders will require borrowers with a deposit of less than 20% to pay for an LMI policy.
Is Lenders Mortgage Insurance non-refundable?
Lenders Mortgage Insurance (LMI) is typically non-refundable. This means that if a borrower pays LMI upfront and then pays off their loan or refinances their loan within a short period of time, they will not receive a refund of the LMI premium.
Is LMI a one off payment?
The reason for lenders mortgage insurance being non-refundable is that it is a one-time insurance premium paid by the borrower to protect the lender in case the borrower defaults on the loan. Once the policy has been paid for, it cannot be refunded or cancelled.
However, there are some conditions in which LMI may be partially refundable. For example, if a borrower has paid LMI on a variable rate loan and then switches to a fixed rate loan with the same lender, the lender may apply the LMI premium already paid to the new loan and issue a partial refund to the borrower.
Do you pay LMI upfront?
Is LMI paid upfront? Yes; however, the payment of Lenders Mortgage Insurance (LMI) can vary depending on the lender and the specific loan.
This brings us to the next question: when do you pay LMI? In some cases, the LMI premium is paid upfront at settlement, while in other conditions it may be added to the loan amount and paid off over the life of the loan.
If the LMI premium is paid upfront, the borrower will need to have it available at settlement. This can be a significant addition to the upfront costs, as LMI premiums can range from several thousand dollars to tens of thousands of dollars, depending on the size of the loan and the size of the deposit.
If the LMI premium is added to the loan amount, the borrower will not need to pay the premium upfront, but they will need to pay interest on the added amount over the life of the loan. This can increase the overall cost of the loan and result in higher monthly repayments.
How much is Lenders Mortgage Insurance for First Home Buyers on the Gold Coast?
The premium for your LMI policy will depend on a range of factors, including the estimated property value and how much of a deposit you have saved. First home buyers, in general, are viewed as higher-risk borrowers than existing homeowners, so they’ll usually be charged a higher premium.
If you’d like a more detailed assessment of how much you’d be charged for Lenders Mortgage Insurance, then feel free to give me a call.
Who else pays the Lenders Mortgage Insurance?
Lenders Mortgage Insurance (LMI) can apply to a range of borrowers, not just first home buyers. Below is a list of borrowers who may be required to pay the LMI premium:
- Investors: If a borrower is purchasing a property for investment purposes and has a smaller deposit, the lender may require them to pay LMI.
- Self-employed borrowers: If a borrower is self-employed, they may be required to pay LMI if they have a smaller deposit or if their risk profile is deemed to be higher than usual.
- Refinancing homeowners: If a borrower is refinancing their existing home loan, they may be required to pay Lenders Mortgage Insurance (LMI) if the loan amount is higher than 80% of the current value of their property.
- Owner-builders. If you take out a construction loan and have a deposit of less than 20%, you may be required to pay Lenders Mortgage Insurance (LMI). This is because the loan amount is typically drawn down in stages as the construction progresses. This means that the loan balance may be higher than the value of the property during the early stages of construction, which could increase the lender’s risk.
Is Lenders Mortgage Insurance worth it?
The answer to this question will depend very much on your personal circumstances. If you’re not far off having a 20% deposit, it could be worth waiting just a little bit longer to avoid it. However, if it’s going to take you years of savings to reach that 20% (during which time property prices on the Gold Coast could continue to skyrocket), then it could very well be worth paying LMI so you can buy now.
How to avoid LMI? Here are 6 ways
Here are some ways to get an LMI exemption:
1. Save more to pay the 20% deposit.
This is the most common way to avoid LMI, as it lowers your loan-to-value ratio (LVR) to 80% or less.
2. Consider a guarantor.
A guarantor is a person who agrees to cover your loan repayments if you default. This can help you borrow up to 100% of the property value without paying LMI.
3. Check if your profession can help you save on LMI.
Some lenders offer an LMI waiver for professionals or discounts for certain professions. This includes medical professionals, accountants, lawyers, professional athletes and more. You may be able to borrow up to 90 or 100% of the property value without paying LMI if you qualify.
4. Qualify for the First Home Guarantee scheme (formerly First Home Loan Deposit Scheme).
The First Home Guarantee can help you avoid paying the lenders mortgage insurance premium by allowing you to buy a home with a deposit of as little as 5% without paying LMI premium. The government will guarantee up to 75% of the required deposit for you, so you don’t need to save up to 20% of the property value. This can save you thousands of dollars in LMI fees and help you get into the property market sooner.
5. Borrow the LMI premium along with your loan.
This is not a way to avoid LMI, but rather a way to reduce the upfront cost. Some lenders may allow you to add the LMI premium to your loan amount, so you can pay it off over time instead of in a lump sum.
6. Take advantage of other government first home buyer grants
There are several Australian government grants that you may be able to avail as a first home buyer, depending on your eligibility and the state or territory you live in. Some of these grants are:
- First Home Owners Grant (FHOG). This is a one-off payment of up to $20,000 for eligible first home buyers who purchase or build a new home. The amount and conditions vary by state or territory.
- First Home Super Saver Scheme (FHSSS). This scheme allows you to save money for your first home inside your superannuation fund. You can make voluntary contributions of up to $15,000 per year and $50,000 in total, which you can withdraw later for your deposit. You may also benefit from the lower tax rate of superannuation.
- Family Home Guarantee (FHG). This scheme is similar to the First Home Guarantee, but it is designed for eligible single parents with dependants who have at least a 2% deposit. You can buy a new or existing home without paying LMI under this scheme(joust.com.au).
- Regional Home Guarantee Scheme (RHGS). This scheme is expected to start in January 2023 and will support eligible regional first home buyers to buy a home in a regional area with a deposit of as little as 5% without paying LMI. There will be 10,000 places available each year under this scheme
What you can do
The best thing to do is talk to an experienced mortgage broker on the Gold Coast. I can review your current situation, answer all your questions and then provide tailored advice for your specific situation. I can also let you know if there are any other options available to you, such as the First Home Loan Deposit Scheme or having someone act as a guarantor on your home loan. To find out more, get in contact via Ph: 0421 934 033 or Ph: 07 5597 6049.