How to avoid paying LMI
Lender’s Mortgage Insurance (LMI) is required when the value of a loan is more than 80% of a property’s purchase price, or property valuation if refinancing. In very basic terms, a lender considers a loan to carry a higher risk if the Loan to Value Ratio (LVR) is above 80%. When the loan amount is more than 80% of the value of the property being mortgaged, the risk to the lender of not recouping their costs, should the borrower default, is increased. The purpose of LMI is to protect lenders should the borrower fail to make loan repayments when the LVR exceeds 80%. A higher deposit means a smaller loan amount and therefore a lower LVR thereby reducing the lender’s risk. Here are some ideas on how you can avoid paying the costly premium.
Save for a higher deposit
The obvious one is to have saved up a deposit for 20% plus costs, therefore your loan amount would be below 80% LVR. Some of our customers, who have been unable to save up the full deposit however, have had a family member able to give them either part or all of the deposit.
Get a guarantor
If you don’t have the financial capacity to meet a 20% 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. 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.
Professional discounts
Some banks offer an LMI waiver of up to 90% LVR if you work within a certain profession - most notably the medical, legal, and sometimes accounting, professions. This can be a great saving for people in these industries. Call us to see if you qualify.
Investors with additional security
If you already own a property with some equity in it (the difference between the current value of the property and the loan balance), and you have found another property to purchase, you can offer both properties as security for the new loan and, depending on circumstances, the full amount including costs of the new property. This is using a method called cross collateralisation.
As you can see there are a few different ways you can avoid paying Lender’s Mortgage Insurance.
