Struggling to save enough for a home loan deposit isn’t just a modern phenomenon – it’s always been difficult.
Despite generations of Australians having to forgo countless movie and dinner dates, being forced to borrow from family members or needing to choose scrambled eggs on toast for breakfast at their parents’ home rather than smashed avo at the local café, it’s typically hard to scrape together enough funds to put down a deposit on a property.
And even if that’s achieved, there are the regular home-loan repayments to think about, too.
Of course, it’s never been tougher to save for a deposit. But there is hope.
For some time, those borrowing more than 80% of their target property’s purchase price have been able to take out lenders mortgage insurance (LMI). This insurance policy, provided by a number of companies, helps financial institutions recover some of their money if borrowers are unable to service their home loan repayments. In short, LMI protects the lender, not the borrower.
For those looking at buying a home, paying the LMI premium means lenders are more prepared to offer loans to customers they might otherwise see as higher risk – even those looking to borrow up to 95% of the purchase price. This means LMI gets borrowers into their dream home sooner … even if if it can be quite expensive.
Here are some frequently asked questions to help you through the LMI maze:
How does lenders mortgage insurance work?
Most lenders ask borrowers for a deposit of around 20% of the value of the home loan. With LMI, however, borrowers have access to the funds with a smaller deposit.
In short, LMI protects lenders while helping borrowers get their home loan approved.
LMI offsets any losses the lender may suffer if the borrower can’t repay the loan amount on their mortgage. When a borrower defaults on a basic home loan, the lender will typically sell the property. However, sometimes the proceeds from the sale are not enough to cover the losses suffered by the lender. This happens when the lender adds other costs incurred while enforcing the mortgage to the cost of the loan. LMI covers the difference, protecting the lender from a default.
LMI is available for both owner occupied and investment home loans. This includes home loans borrowers use to buy their first home.
How do I qualify for lenders mortgage insurance?
Some lenders may require LMI while others won’t. Many make it a borrowing precondition if customers have less than the required 20% deposit. Most lenders use it as a safety measure.
To qualify for LMI, you need to be able to meet the regular monthly repayments that service your home loan. The LMI insurer will check this while you are in the process of securing your home loan. A home loan repayment calculator can help you to estimate your repayments.
How much does lenders mortgage insurance cost?
This varies depending on the LMI provider, the size and length of your loan, whether you are a first-home buyer and the amount you have as a deposit.
As an example, leading LMI provider Gemworth provides a calculator that shows that a first-home buyer looking to borrow $800,000 over 30 years but with just $80,000 (10%) deposit would pay $17,568 (plus stamp duty) in LMI. It estimates this would be a LMI premium of $88 on the monthly mortgage repayments.
How do I pay lenders mortgage insurance?
You usually pay LMI as part of your home repayments. You have the option to pay it only once, as an upfront cost, during the settlement of the loan. It covers the lender until the end of your home loan term.
The LMI premium takes into account two key factors. The first is the type of loan you request. The second is the size of your deposit. Some lenders are willing to add this premium to the total loan amount that can reduce your upfront costs significantly.
You should bear in mind that LMI might be subject to GST. Lenders will tend to include this in their quote. You would need to check this with your lender and the LMI provider.
How can I avoid paying lenders mortgage insurance?
The easiest answer is to find other ways to ensure you have more at least 20% of your property’s purchase price. This might be through making extra savings or borrowing funds from family or friends.
You might also be able to convince a family member to be a guarantor, who would take responsibility for the loan debt. This is not a risk that should be taken lightly – the guarantor would be forced to repay the balance of the loan if you default.
Some LMI providers may also be persuaded to waive their insurance premiums if you can prove that you work in a steady, well-paid industry with little prospect of redundancy. This includes, for instance, those employed in medical or legal professionals. It’s assessed case by case.
How much deposit is required to avoid lenders mortgage insurance?
If you’re able to come up with at least 20% deposit on the purchase price of your property, you can avoid having to take out LMI and pay the associated premiums.
Is lenders mortgage insurance a tax deduction?
The Australian Tax Office allows you to claim a deduction for borrowing expenses associated with purchasing your property, and this includes LMI. This deduction is generally spread over five years or the term of the loan, whichever is less.
How does lenders mortgage insurance benefit the buyer?
LMI allows lenders to safely loan money to those who do not have a minimum deposit for their target property. In this way, it allows borrowers to own their home sooner.
Can lenders mortgage insurance be added to my loan?
Lenders generally include the LMI premium into their monthly repayment schedule although it can be paid upfront.
How to I get rid of lenders mortgage insurance?
Once you have at least 20% equity in your property (in other words, you owe less than 80% of your property’s value), you may be able to ask your lender or LMI provider to cancel the policy. You will likely need to show a good repayment history.
How do I get a refund on lenders mortgage insurance?
You may be able to get a partial refund (up to 40%) on the amount you pay in LMI is you repay your loan early. You might also be eligible for a partial refund depending on how you’re progressing with your home-loan repayments in the first two years.
What to do next
With the help of a uno home loans professional, you can secure a mortgage that has affordable lenders mortgage insurance. We recommend that you do the following:
This information is general in nature, and you should always seek professional advice when making financial decisions.