What is Lender’s Mortgage insurance (LMI)? Find out how you might be able to avoid it.
Lender’s mortgage insurance (LMI) is normally required when the value of a loan is more than 80 per cent of a property’s valuation (Land and Build package cost). In very basic terms, a lender considers a loan to carry a higher risk if the loan-to-valuation-ratio (LVR) is above 80 per cent and LMI is payable. It provides no protection or insurance for the borrower at all. It is a one-off fee added to the loan cost and can be very expensive. Here’s how you can avoid paying the costly premium.
Save for a higher deposit
The purpose of LMI is to protect lenders should the borrower fail to make loan repayments when the LVR exceeds 80 per cent. When the loan amount is more than 80 per cent of the value of the property being mortgaged, the risk to the lender of not recouping their costs, should the borrower default, is increased. A higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. A loan of 80% or less of the property’s value is the key to avoiding paying LMI.
Get a guarantor
If you don’t have the financial capacity to meet a 20 per cent deposit but still want to avoid LMI, you do have the option of getting a guarantor for your loan. A close relative, such as a parent, sibling or perhaps a grandparent, may be eligible to act as a guarantor and they use the equity in their property to help you secure yours and keep your total loan below 80%. In some instances, having a guarantor on your loan may mean that you won’t need a deposit at all.
Use the Government FHLDS Scheme
If you are eligible as a First home buyer for total house and land package under $400,000 (in Western Australia) and are within the personal income limits, the Govt will act as guarantor for your loan, thereby waiving the LMI fee. You will still need to meet the lender credit criteria, and spots are limited, however this is an alternative if a family member is not able to assist.
In WA Use State Government lender Keystart
If you meet the strict criteria for eligibility you may be able to get a loan with the State Govt of WA lender Keystart. Keystart allows a small deposit with no genuine savings and does not charge a LMI fee. However the criteria to be eligible is fairly narrow and the interest rate is normally higher than other lenders.
Professional Industry Occupation
Some professional occupations are eligible through their tertiary qualifications and industry association memberships to avoid paying the LMI fee. Medical Professionals, Lawyers, Accountants, and some other Mining Industry professionals may be eligible. Lenders have different policies to waive LMI fees and these often change.
There are advantages and negatives with all the above options, costs and benefits, and there is no one best option, as everyone has slightly different situations and options, objectives and needs. Expert credit advice from Total Choice Home Loans can help you compare and contrast the options that may be available to you, to help you get the best loan structure for your personal needs. Total Choice can help you find a loan that won’t require you to fork out for LMI.
Note all options still have credit criteria and limits, policies and criteria can change at any time. There is no guarantee of approval. We recommend seeking credit advice to find out what your options are. Contact Jonathan Oxlade at Total Choice on 0411 870 957 for an appointment. Australian Credit Licence 385844
Oxlade Enterprises Pty Ltd ATF Oxlade Family Trust Trading as Total Choice Home Loans is licensed by ASIC Australian Credit Licence: 385844