Home buyers in NSW take up to five years to save for a deposit. However, it is possible to break into the property market sooner by paying lenders mortgage insurance (LMI) on your home loan.
Most lenders require you to pay LMI to protect themselves against default when you borrow more than 80 percent of the property’s price. Running into thousands of dollars, LMI, though an additional cost, can propel your home buying journey.
The amount of LMI depends on several factors including the size of the loan, the amount of deposit, the type of property you are buying and even your profession. Read this comprehensive guide for all you need to know about LMI.
You can use this Genworth LMI premium calculator to get an idea of what it would cost you to buy your home early. For example, a first-time buyer purchasing a property worth $800,000 with $100,000 deposit would end up paying up to $11,620.00 as LMI (estimate based on Genworth LMI premium calculator).
How to avoid paying LMI?
As you can see, LMI is a large cost that adds up to your home loan, even though you may not pay it upfront. While LMI facilitates home loans for borrowers with less deposit, it is possible to avoid paying LMI in some cases.
If you are wondering how to avoid paying LMI, here are five tips to help you save money and buy your home sooner:
- Save up a fatter deposit – The best way to avoid paying LMI is by saving a 20 percent deposit for your purchase. As home loans with LVR of more than 80 percent are considered risky, lenders require you to pay LMI to reduce the risk to their money. LMI is also applicable on low-doc loans and for borrowers who don’t have a strong credit history.
Thus, the easiest way to save up on LMI is by maintaining financial discipline. You can kick-start your savings with a reasonable household budget and by keeping your money in a high-interest rate savings account. Click here for tips to grow your deposit faster.
In case you own an investment property, you could always use the equity in the property to fund the deposit on your home. Besides, if you are a first home buyer, don’t forget to apply for FHOG in your state to supplement your deposit.
- Ask a family member to guarantee your loan – Family guarantee loans continue to remain popular with first-time homebuyers who can borrow the full value of the property with a family member guaranteeing their loan. Most commonly, parents use their home to secure their kids’ mortgage. In some cases, lenders may allow siblings as well as grandparents to guarantee a home loan.
However, guaranteeing a home loan is a huge responsibility, and your parents risk losing their home if you default on the payments. Learn more about family guarantee loans here.
- Request mum and dad to chip in some cash – The bank of mum and dad remains the most popular way for first-time homebuyers in Australia to fund their homes. Yes, over 50 percent first-time buyers turn to their parents for help when it comes to buying their home. By requesting your parents to chip in some cash towards your deposit, you can not only avoid paying LMI but also negotiate a better rate on your home loan. On average, Australian parents pay up to $85,000 to get their kids on the property bandwagon.
If you do ask your parents for help, note that some lenders might not accept cash from parents as part of your genuine savings. Thus, it is a good idea to keep the amount in your savings account for a few months before applying for a home loan to demonstrate financially responsible behaviour to lenders. It is advisable to speak with a mortgage broker to understand your options better.
- Use your profession to your advantage – Professionals such as lawyers, doctors and engineers are considered less risky by financial institutions and can use this fact to their advantage by negotiating lower rates or requesting LMI waiver on high LVR loans. You can read about professional home loan packages here or speak to an experienced broker to get the best deal on your home loan.
- Shop around – The amount of LMI you pay depends on various factors including your LMI provider. In Australia, Genworth and QBE are the two leading providers of LMI. However, certain financial institutions self-insure their home loans, and it is worth taking quotes from a few lenders to ensure you pay the minimum possible amount as LMI.
When making one of your life’s biggest purchases, your home, it pays to have an expert by your side. Your mortgage broker is aware of the requirements of different lenders and can guide you to the best-fit loans for your situation at the most competitive rates. Once you inform your broker of your requirements, they will get you quotes from various lenders, making a difference of thousands of dollars on your home loan in terms of lower LMI payments as well as interest rates. With HashChing, you can find verified mortgage brokers in your vicinity who will do all the legwork for your home loan, saving you time, money and hassle, at absolutely no cost to you!
By Vidhu Bajaj,
HashChing Content Writer