Lenders Mortgage Insurance is a term that generally doesn’t cause a great deal of excitement amongst home buyers – but what is it, and do you need it?
Introduced to the Australian market in 1965, Lenders Mortgage Insurance (or LMI) was essentially designed to allow more Australians to enter the housing market, while allowing the lender to protect themselves in the event that you defaulted on your loan.
Typically, LMI is compulsory if you don’t have a 20% deposit for your home loan. In 2020, the median house price for Brisbane ranges from $550, 000 to $900, 000. Without the option of Lender’s Mortgage Insurance, buyers would be expected to save a whopping $110, 000 at the very least to purchase a property. This figure is simply unobtainable for many, especially first homeowners looking to get their foot on the property ladder.
Lenders Mortgage Insurance Explained
Lenders mortgage insurance operates on a sliding scale and varies depending on how big (or how little) your deposit is. Let’s look at some comparisons.
While the thought of adding potentially thousands of dollars to your mortgage may seem daunting, Lenders Mortgage Insurance offers a glimmer of hope to those wanting to get into the property market faster – why pay rent, when you can pay off your own home? The amount of your LMI doesn’t need to be paid upfront, it can be capitalised into your loan, but be careful as the premium today may be $10,000, but over 30 years it will be significantly more with compounding interest.
There is a common misconception that LMI is designed to protect the buyer. However, it is in fact in place to protect the lender, in the event that the buyer was to default on their loan. Madd Loans owner George Samios helps buyers to navigate LMI on a daily basis and explains the logic behind it.
“What the banks usually want is for you to have a 20% deposit, or say a $100, 000 deposit for a $500, 000 loan. If you look at it on a scale, the bank has a certain amount of debt secured against your loan. If something were to happen to you or the repayments – and the bank did have to sell the property – even if they had to sell the property for $450, 000 at a loss, the loan amount is covered, and the bank isn’t losing any money on the debt.”
How To Avoid Paying Lenders Mortgage Insurance
While it may not be an option for some buyers, there are a few ways to avoid paying the Lenders Mortgage Insurance premium that accompanies loans with less than a 20% deposit.
Save For A Bigger Deposit – This may feel like stating the obvious, but it’s a straightforward one. On a national average in Australia, it takes 4.6 years for the average couple to save 20% for their first house deposit. This could vary depending on where you live. There is also the First Home Super Saver Scheme which allows first home buyers to make voluntary concessional (before tax) and voluntary non-concessional (after tax) contributions to their superannuation fund, to be used as a first home deposit.
Guarantor Loans – A guarantor mortgage loan is mostly quite similar to a standard home loan, only a selected guarantor (usually a parent or guardian) signs the loan as your “backer”, even though they have no rights over the property itself. If approved, guarantor loans can enable buyers to access loans up to 105% of the property value without needing LMI.
First Home Owners Grant – If you’re looking at buying or building a brand new home, and you meet the criteria you may be able to access the $15, 000 First Home Owners Grant. This can also be partnered with the recently announced HomeBuilder Grant, which can provide an additional $25, 000 – it all adds up!
Want To Know More?
Why not book yourself into one of Madd Loan’s free First Homebuyer Workshops? Conducted completely online in a webinar format, George and the team at Madd run participants through the world of finance when it comes to your first home loan. George shares his tips, tricks and even his own mistakes along the way to ensure that you get pre-approved the first time and gives participants the tools to fast track them into their dream home.