Saving a deposit is often one of the biggest challenges for first home buyers.
If your deposit is smaller than the lender’s standard requirements, you may be required to pay Lenders Mortgage Insurance (LMI). The Australian Government’s Moneysmart website provides a useful overview of how LMI works.
Despite its name, LMI does not protect you as the borrower. It protects the lender if they suffer a loss because the loan cannot be repaid.
When is Lenders Mortgage Insurance required?
LMI is generally required when you borrow more than 80% of the property’s value.
This is known as the Loan to Value Ratio (LVR).
For example:
- If you’re buying a $700,000 home and have a $140,000 deposit (20%), your LVR is 80%, and LMI is generally not required.
- If you have a $70,000 deposit (10%), your LVR is 90%, and LMI will usually apply.
The exact requirements vary between lenders and loan products.
How much does LMI cost?
The cost of LMI depends on several factors, including:
- The value of the property
- The amount you are borrowing
- Your Loan to Value Ratio (LVR)
- The lender you choose
As your deposit becomes smaller, the cost of LMI generally increases because the lender is taking on more risk.
Because every lender calculates LMI differently, premiums can vary significantly. Some lenders allow the cost of LMI to be added to your loan, rather than paid upfront. While this can reduce your initial out-of-pocket costs, it also means you may pay interest on the insurance premium over the life of the loan.
Is paying LMI always a bad thing?
Not necessarily.
Many people see LMI as an extra cost to avoid, but in some circumstances it can help you purchase a property sooner rather than waiting several more years to save a larger deposit.
The right decision depends on your personal circumstances, including:
- How quickly you’re able to save
- Property prices in your area
- Your long term financial goals
- The overall cost of waiting compared with buying sooner
Sometimes paying LMI may make sense. In other situations, there may be alternatives available.
Are there ways to avoid LMI?
Depending on your circumstances, you may be able to avoid LMI by:
- Saving a deposit of at least 20%
- Using a parental guarantee or family guarantee
- Accessing an eligible government home buyer scheme
- Choosing a lender that offers LMI waivers for certain professions
Not every option is available to every borrower, so it’s important to understand which solutions may apply to your situation.
Looking beyond the deposit
At You First, we believe buying a home is about more than simply qualifying for a loan.
It’s about understanding how your mortgage fits into your broader financial plan, including your cash flow, future goals and long term strategy.
If you’re buying your first home and want to understand how LMI may affect your borrowing options, we’re always happy to have a conversation.
The information in this article was accurate at the time of publication and is intended as general information only. It does not take into account your personal objectives, financial situation or needs. Laws, regulations and lending policies may change over time, so you should seek professional advice before making financial decisions.