As interest rates rise, and first-home buyers (FHBs) grow older, the pressure is higher than ever to get into the property market. This pressure can result in many buyers jumping into the buying fray, regardless of their deposit. Yet the basic fact remains: anything less than a 20% deposit equals paying Lender's Mortgage Insurance (LMI).
What is LMI?Lender's Mortgage Insurance (LMI) is a one-off payment made to your lender if your home loan deposit is under 20%, or your loan-to-value ratio (LVR) is less than 80%. Anyone in this category is seen as higher risk so this insurance protects your lender - not you! - against any shortfalls, defaults or other such financial dramas you may encounter. Yet LMI also assists FHBs and other home buyers. It was introduced to Australia in 1965 - after the concept began in the US during the 1930s Great Depression years - to "bridge the deposit gap” for FHBs. According to an Insurance Council of Australia paper, this gap was a "significant impediment to achieving the dream of homeownership." There's little doubt this impediment is still high in the 2020s with property prices skyrocketing over 20% during the COVID years - and only easing by around 1-2% in 2022. (NB: some FHB grants and schemes enable you to purchase a home with just a 2% deposit while paying no LMI, as the government acts as your guarantor. Guarantor home loans also don't require an LMI, regardless of your deposit figure).
How is Lender's Mortgage Insurance calculated?This figure varies depending on several factors including your lender and their insurer, your deposit figure, your loan size, employment stability and whether your new property is an investment or owner-occupier purchase. However, the LMI is generally a percentage calculation of the amount you need to borrow from the lender ie those with low deposits will generally pay a higher LMI.
How is Lender's Mortgage Insurance paid?Again, this depends on your lender, but LMI is either paid upfront when you take out a loan or becomes part of your overall loan and will need to be paid off over time.
Why should I avoid paying Lender's Mortgage Insurance?LMI certainly enables FHBs to buy property earlier and easier, particularly as interest rates rise, real-time wages stall and there's less in your shopping trolley for more. That being said, LMI means you have less of a deposit and less of a deposit means a longer loan term - and none of us wants that. As well, even LMI figures that initially look small can add up fast over a 30-year loan adding hundreds of thousands of dollars to your home loan. In other words, the LMI disadvantages can outweigh the benefits.
How can I avoid paying Lender's Mortgage Insurance?
- Are you in a low risk (of redundancy) profession or industry? Lenders like the medical and legal professions for this reason - and may waive LMIs because of it
- Shop around with different lenders as they all have varying rules around LMI
- Investigate FHB government grants and schemes or guarantor loans
LMI vs higher savings – which is better?There's no right or wrong answer to this question. It all depends on you, your familial situation and your priorities. A strong deposit will lessen the life of your loan which is excellent news. But then a smaller deposit with LMI - and less time waiting for savings to grow - may bring you a nice home sooner. We do encourage you not to get pulled down by the panicked pressure of the current property market. The market won't crash now and it certainly didn't in the GFC years or even the 1980s-1990s when interest rates soared to a record-high of 17.5%. Do your research. Stay strong and confident. And you got this, LMI or not!
LMI key points to take away
- Required for home loan deposits under 20%
- Protects lenders from riskier low-deposit borrowers
- Helps buyers get into the market with a lower deposit
- Figures vary depending on your lender, loan and deposit size, and other factors
- Paid off at the start of your loan or over the life of your loan
- Can result in a longer loan term but can be a great financial booster
- Doesn't always need to be, for example, with FHB government grants and schemes and guarantor home loans