Getting a Home Loan in Australia if you're living overs...
29 Nov 2023
A Lenders Mortgage Insurance premium is the fee borrowers pay lenders. The LMI serves as extra protection for the lender in case the borrower defaults or fails to pay back the loan.
Generally, borrowers are considered high risk if they have a loan-to-value ratio (LVR) of over 80%. This is the case when borrowers don’t provide a deposit of at least 20% of their chosen property’s value.
A borrower’s LMI depends on various factors, but relies heavily on the borrower’s financial circumstances, the size of the loan, the deposit amount, and the LMI provider. The property’s location can also play a role in the cost of the LMI because of stamp duty.
Usually, the higher your LVR is, the more expensive your LMI will be. By borrowing more, there is more risk of financial loss to the lender if you default on your loan.
The LMI can be paid upfront to the lender at the loan settlement stage. Alternatively, most lenders allow the borrower to add the LMI fee to their regular repayments and pay it throughout their loan term. Each option has its pros and cons. Which one is best depends entirely on your financial situation.
You can reduce the cost of LMI by providing a larger downpayment or deposit. The lower your LVR is, the lower your LMI will cost. For example, a deposit of 10% of the property’s value will garner significantly less LMI costs compared to one of only 5%.
The last thing people want to do when buying a home is fork out more money by paying LMI fees. Here are helpful ways you can avoid being charged LMI:
If you are a first home buyer, you may be able to buy a property with a 5% deposit without paying LMI, with the First Home Loan Deposit Scheme. Factors such as: where you are buying, your income, and the value of the property you are buying, will all affect your eligibility.
Lenders will typically exempt borrowers from having to pay lenders mortgage insurance. That 20% deposit is viewed as a buffer, large enough so that if there was a fall in the value of the property, the lender would be protected as they could recover the amount owed to them if the borrower defaults.
However, a larger deposit may be required in some circumstances. This may happen when the buyer is looking to purchase property in a particular suburb that the lenders perceive as having high default rates and or at risk of a large fall in prices. In this instance, the lender may require a larger deposit for the borrower’s LMI to be waived (around 30% to 40%).
You can also build a bigger deposit and in turn, potentially avoid paying LMI by buying in a more affordable area where your deposit will stretch further. Finding cheaper co-living arrangements for 12 months could also be an option for those looking to save a larger deposit.
Usually, if the borrower is backed by a quality guarantor (e.g., parent or guardian) that legally accepts responsibility for the mortgage repayments if the borrower cannot make them, the lender will waive the LMI on the loan, regardless of how small the deposit is.
If you earn a high salary and have a solid employment history working professionally in certain industries, some banks and lenders may offer an LMI waiver. Some professions that may receive an LMI exemption include doctors and other medical professionals, actuaries, accountants, solicitors and professionals in the entertainment industry.
Some lenders will offer discounts or waive LMI fees for some borrowers, though you should always compare different loans predominantly based on rates and fees.
If you are eager to get your foot in the property market door but don’t have a 20% deposit yourself, there is the option to partner with someone else and buy the property as a joint project. This avenue means you both contribute to the deposit and in turn lower the risks and financial obligations.
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