July 30, 2021

What Is LMI and How Can You Avoid It?

No LMI Home Loans

No LMI (Lenders Mortgage Insurance) Home Loans are becoming more common in the market. Your mortgage broker What If We Finance will explain today what LMI is and how it can be avoided.

What Is LMI?

Traditionally in Australia, banks required a 20% deposit to purchase a home. However, with property prices rising so quickly, not many people may have this amount saved. This is where LMI comes in.

LMI is an insurance premium charged to protect the interests of the bank in the unlikely event you default on your home loan. LMI can apply if you do not have a 20% deposit and in some instances, some banks for certain suburbs may require a 30% deposit to avoid LMI.

LMI is a one-off fee and can be paid upfront or added to your loan. If adding LMI to your loan, you need to be careful, because you could end up paying interest. LMI varies between 0.75% and 4% of the loan amount and as a rule, the lower the deposit, the higher the LMI.

You do not need to organise LMI. Your independent mortgage broker, What If We Finance, will take care of this for you.

By using a mortgage broker and depending on your circumstance, LMI can be avoided.

How Can I Avoid LMI?

Specialist Professions

LMI for some professions, such as Doctors, Lawyers, Accountants, and certain medical specialist professions (e.g., chiropractors, physiotherapists) can be avoided.

Typically, banks who waive LMI for given professions will only require a 10% deposit plus government fees, and you do not have to pay LMI. For example, if you buy a new home for $900,000 and government fees are $50,000, you need $140,000 to avoid LMI.

In the above example, depending on the lender, LMI can be as high as $30,000, so you effectively save this amount.

The savings in such circumstances are substantial, and it makes sense to avoid LMI by selecting the appropriate lender who will waive LMI.

It's important to note that lenders review LMI waivers on a case-by-case basis. Some lenders have minimum income thresholds and may even have limitations on the type of finance.

First Home Loan Deposit Scheme (FHLDS)

The Australian government aims to support eligible buyers by making available a limited number of places each year to support first home buyers to buy a new home. Under this scheme, the government guarantees the loan. Effectively, you can buy a new or established home with a deposit as low as 5% and no LMI.

The scheme has strict criteria, including:

  • All applicants must be Australian Citizens
  • Maximum income threshold for single and joint applicants
  • Maximum property purchase price

In addition, there are limited places available. Typically, the government releases approximately 10,000 places per annum, and these places disappear quickly.

An important point is that each lender has different credit criteria, and this means, for example, some lenders will require a 10% deposit for construction and also genuine savings. All these requirements can be explained and managed by your independent mortgage broker.

Family Guarantee

A Family Guarantee is where a family member offers their property as security to buy a home. The goal is to use the equity in their home to help you avoid LMI. This type of arrangement has a number of risks, and needs to be carefully considered. Legal advice may even be required.

As you can see, there are a number of options that can be explored to avoid LMI. Given the complexity of lender rules and policy, it makes sense to contact your mortgage broker What If We Finance today.

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