Saving for a 20% house deposit is like house training a wilful Labrador. It requires plenty of patience and persistence. Not your thing? You could take out lenders mortgage insurance (LMI). But how much extra does that cost? And can you avoid paying for it? (for the LMI, not the dog…)
LMI is a type of insurance that protects the lender (not you or any guarantors) if you can’t keep up with your home loan repayments.
It’s typically applied to home loans when your deposit is less than 20%. And right now, that’s the case for many home buyers.
A recent Mozo study found 84% of Australians saving a deposit can’t currently afford the full 20% deposit needed to avoid LMI – in no small part due to increasing property prices.
In fact, the national median property price is now $973,300, up from $949,400 in December last year and $649,300 in June 2019.
So, let’s shed a light on how much LMI can cost – plus ways to make the expense more manageable or possibly disappear altogether.
How much LMI could I pay?
LMI typically works out to about 1% to 2% of your loan value, depending on the size of your deposit and the size of your loan.
The more you can stump up as a deposit, the lower the LMI premium can be.
We’ll use this handy LMI estimator to show how it works (feel free to give it a go yourself).
Let’s say you’re buying an apartment costing $500,000. If you have a 10% deposit of $50,000, LMI will likely cost around $8,680.
It all depends on the price of the property you’re buying and your deposit amount. For example, the LMI premium can be as high as $36,480 if you have a $150,000 deposit for a $1,500,000 home.
The good news is that there are ways to manage – and potentially even bypass – LMI. Here are three ideas to consider:
1. Talk to us
Unlike other types of insurance, you can’t shop around for the cheapest LMI provider. Your bank will organise cover and let you know how much you’re up for.
However, different lenders use different LMI insurers. So the premium can vary depending on the lender you choose.
That’s why it’s important to talk to us.
We can explain what the LMI premium is likely to be for each lender you’re considering. This could see you potentially save on LMI.
2. Pay LMI off gradually
Instead of paying LMI in a lump sum, your lender may agree to add the cost to your loan balance.
This way you can pay LMI off gradually as part of your normal home loan repayments, but the downside is you’ll likely be paying interest on that LMI amount over the life of your home loan.
Remember that example we used earlier of a $500,000 apartment with a $50,000 deposit?
Adding the LMI premium to your home loan in that scenario could result in your monthly repayments increasing by about $45-65 per month over the life of a 30-year home loan, depending on the interest rate at the time.
Alternatively, some LMI insurers can allow you to pay your LMI premium in monthly instalments until you’ve got a suitable amount of equity built up in the property that your lender is satisfied with.
3. Have LMI waived altogether
Like the sound of sidestepping LMI completely?
Here are a few strategies that could scratch the cost of LMI from your buying budget:
– Use your job: some lenders waive LMI for workers in certain professions such as doctors, lawyers, accountants, vets, engineers and pharmacists.
– Tap into the Home Guarantee Scheme: this scheme sees the Australian government guarantee your loan, allowing first home buyers to buy with just a 5% deposit, or as little as 2% if you are a single parent – and no LMI to pay.
– Ask a family member to guarantee your loan: a guarantor can provide additional security, such as the equity in their own home, to raise the security on your loan up to the equivalent of a 20% deposit.
Next step? Contact us
If you’re having trouble saving up for a 20% deposit, contact us today.
We can help give you a clearer idea of what you could be up for in LMI, and help you discover any steps you may be able to take to keep a lid on the cost.
Disclaimer: The content of this article is general in nature and is presented for informative purposes. It is not intended to constitute tax or financial advice, whether general or personal nor is it intended to imply any recommendation or opinion about a financial product. It does not take into consideration your personal situation and may not be relevant to circumstances. Before taking any action, consider your own particular circumstances and seek professional advice. This content is protected by copyright laws and various other intellectual property laws. It is not to be modified, reproduced or republished without prior written consent.
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