What first home buyers need to know about lender’s mortgage insurance

Hurdles on a running track representing hurdles faced by first home buyers

Australian property prices might be falling, but getting on the property ladder can still be challenging.

The biggest hurdle? Saving a 20% deposit – which can take years of scrimping, particularly if you’re paying rent simultaneously.

However, if you are prepared to pay lender’s mortgage insurance (LMI), you might be able to fast-track your property purchase.

What is LMI?

LMI is a one-off insurance payment you generally pay when you borrow more than 80% of a home’s value (i.e. your deposit is less than 20%).

While you pay the premium, LMI protects the lender – not you – from financial loss should you subsequently default on your home loan repayments.

As a result, it’s very different to mortgage protection insurance, which covers the borrower if they can no longer meet their house loan repayments.

How much is LMI?

How much LMI you pay depends on three things:

  • The size of your deposit
  • The size of your home mortgage 
  • The lender

An expert mortgage broker like NMC Finance can help you estimate your LMI premium based on your personal circumstances.

How do you pay LMI?

LMI fees can be a big expense. Fortunately, you don’t necessarily have to pay them upfront, as many mortgage lenders let you capitalise your LMI premium. This means the premium gets added to your total loan amount, and you pay it off in regular instalments with your home loan.

Keep in mind this will cost you more in the long run as you will pay interest on the premium. Capitalisation will also slightly increase your monthly repayment.

How can you avoid paying LMI?

Understandably, you might not want to add thousands of dollars to your overall costs. That said, in some cases, paying LMI can be beneficial as it helps you buy a home sooner rather than later. As a result, you’re paying off your mortgage – and not your landlord’s – and building equity.

That said, there are other ways you can get on the ladder with a small deposit while still avoiding LMI. These include:

  • Making use of government schemes and incentives – the federal government’s Home Guarantee Scheme helps 35,000 first-home buyers each financial year buy a new or existing home with a deposit of as little as 5%. Similarly, in Victoria, the state government has a shared equity scheme to help first-home buyers buy a place of their own.
  • Asking your parents to guarantee the loan – you can avoid LMI by using your parents’ equity in their home as additional security.
  • Working in a specific profession such as medicine, accountancy or law – as some home loan lenders will waive or lower the LMI fee
  • Rentvesting – this is where you rent a property in an area you want to live while buying an investment property in a suburb you can afford

Looking to break into the property market? NMC Finance is an experienced home loan mortgage broker and can help you get on the ladder. Contact Nathan Coad on 0498 766 639 or nathan.coad@nmcfinance.com.au to find out more.

* This blog is intended for general informational purposes only. For personalised advice tailored to your unique financial situation, please contact NMC Finance.

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