Lender’s mortgage insurance can be a pain, especially for prospective first home buyers and those struggling to get onto the market.
Avoiding lender’s mortgage insurance is easy if you already have cash, and already have properties, but for those for whom getting a deposit together in the first place is a massive hurdle, it is just another mountain to climb, and extra couple of thousand dollars that you have to raise.
Entering the property market is hard, because saving is hard, and if you don’t have a family member who can help with a deposit or friendly contribution, LMI is a burden above and beyond. Here’s our list of the most realistic ways to avoid having to pay lender’s mortgage insurance.
It goes without saying that the best way to avoid paying lender’s mortgage insurance is to have a lower than 80% loan to value ratio. While many struggle to get enough deposit together to get onto the ladder in the first place, if you already have a property that can be used as equity, or in any way can scrape together 20% of the property price for a deposit, then that is the obvious route to take.
LMI is an added expense on top of the deposit, so consider whether you mightn’t be better off just saving for longer to avoid it entirely, thus sinking more of your money into the property that you’re going to buy and thus own for a long time. It might be a better use of your cash in the long term than paying insurance on your own home loan.
If you can’t pay LMI, or want to avoid it, then get the government to pay it for you. No, really: if you qualify for the First Home Loan Deposit Scheme, then this in an option for you. If you, or you and your partner, are both Australian citizens, you can buy your first property with just 5% deposit and zero LMI, courtesy of the Federal Government.
Be wary though: the Government schemes aren’t forever, and are limited to just 10,000 places per year, so make sure that you qualify and that you get it sorted before you enter into the loan application process.
The home loan process is somewhat stacked in favour of the lenders – it’s their money, after all – and you’ll have to jump through a few of their hoops to get the mortgage that you want. Unfortunately for self-employed Australians, that can be a problem, as major banks tend to prefer those with ‘traditional’ jobs. That isn’t to say that there aren’t loans out there for self-employed Australians, but the options for getting one at a lower rate, and without LMI, are more limited.
The good news is that if you have a ‘low risk’ profession, then you might well be able to get a loan more easily and get LMI waived. The best way to avoid paying lender’s mortgage insurance is largely to convince a lender that they don’t need it, so having the sort of job that they like certainly helps.
You might be the sort of person that the bank thinks requires LMI, but are your parents? This isn’t a silly question: the Bank of Mum and Dad might be your best route onto the property ladder, either via a guarantor loan that utilises the equity built into your family home or via lending the cash off a family member to get you where you need to be.
Ultimately, it might make more financial sense for your to get your inheritance now and invest it into a property that will accumulate value over time rather than save it for when your parents aren’t here and the relative value of that cash, against rising property prices, is less.
Not all lenders are created equal when LMI is concerned. There are options out there to avoid lender’s mortgage insurance through banks and non-banks that simply don’t ask for it.
86 400, the digital bank, are one such option: they’ll do you a 85% LVR, no LMI offer that drops 5% off the amount of deposit that you might otherwise have to put together, for example. That’s a fairly significant discount. They’re backed by NAB, too, so what you’re getting a serious home loan from a serious player with no lender’s mortgage insurance on a 15% deposit.
First Home Buyers are the ones burdened by LMI, but those on the property ladder can help out and give them a lift up. A shared equity agreement allows an existing property owner to fund part of the price of the home, reducing the amount that is required to purchase it on the proviso that, later on, the FHB buyers the equity partner out.
The mortgage is on the price of the property, minus the deposit and the contribution from the equity partner, thus reducing the price. You still have to pay the partner back, but that might be considerably less in terms of interest – potentially zero, if that equity partner is, say, your Mum – or simply when you sell the house later on once it has accumulated value.
If you buy a house for a million dollars now, and you get 20% of the price from an equity partner, that $200,000 might not seem so big if the price has risen to $2m in 10 year’s time. That’s why SEAs can be a good idea.
