Saving for your own home is no small task, and if you don’t have the 20% deposit asked for by the banks, you’ll likely end up paying Lenders Mortgage Insurance (LMI). But how much is LMI and how do you minimise it? To answer this question, let’s go through everything you should know about LMI and how it applies to you.
Darren Walters’ unique no or low deposit new home system has helped thousands of renters become homeowners over the years. And a big part of this is capitalising on LMI and using it to increase your chances of entering the property market. Many of our clients thought homeownership was always going to be out of reach for them. But that wasn’t true!
In fact, by simply filling in our pre-qualification form, they were able to discover their factual options and begin the journey to becoming a homeowner.
What is LMI?
LMI is insurance that most banks and lenders will make you pay if you don’t have a 20% deposit. Its purpose is to protect the lender from any financial losses they could incur if you don’t make the repayments. If you default on the loan and the sale of the house doesn’t make up the difference left on the loan, the lender can claim the LMI insurance policy. The insurance agency then has the right to chase you for the amount they paid to your lender.
Lenders usually prefer LMI to be paid for upfront, however, most will let you add it to your loan repayments and pay it off over time. Doing it this way will incur additional interest, however, it will make the repayments much smaller and more manageable.
Here’s an example to explain how LMI works.
Steve gets a home loan of $400,000 from his bank. His deposit was less than 20% so he has to pay LMI. Steve pays off $10,000 but then loses his job and defaults on the loan. The house is repossessed and sold for $300,000 due to a downturn in the market. This leaves $90,000 unpaid and owing on the mortgage. Steve’s lender files a claim to their insurer for the $90,000. At this point, the insurer will then chase up Steve to pay them the $90,000.
The Benefits of LMI
While it can sound like LMI is a bad thing, there are actually several benefits to it.
The first and most obvious benefit is that it means home buyers have access to mortgages without a 20% deposit. In fact, LMI was created to increase the number of home buyers and enable renters to borrow without the huge deposit required by many lenders.
There’s also the fact that the property market is almost always strong. Historically, property prices have doubled every 10-15 years in Australia. This means, in the rare event that you default on your loan and your house needs to be sold, that it will likely sell for more than you originally purchased it for. So your lender won’t need to put in an insurance claim and you won’t be liable to pay for it.
Property prices are on the rise and paying for a small deposit with LMI allows you to get into the market now. The longer you wait, the more difficult it’ll be to get out of the rental market and gain the freedom of having your own home.
Don’t miss out on your chance to enter the property market. Take the first step today by filling in our quick pre-qualification form and let Darren’s no or low deposit new home system guide you out of the rental nightmare and into your own home.
How Much Does LMI Cost?
The actual cost of the LMI will depend on a variety of factors. Your lender will perform a risk assessment during your application to figure out how much they’ll charge you. We can’t give you an exact number, but we can give you a ballpark figure of the cost. You should also consider the added cost of interest over time if it’s not paid for upfront.
Estimated LMI Costs
| Loan Amount | LMI with 5% Deposit | With 10% Deposit | With 15% Deposit |
| $500,000 | $14,871 | $8,671 | $4,712 |
| $600,000 | $23,954 | $13,284 | $6,462 |
| $700,000 | $27,946 | $15,496 | $7,541 |
*Note these figures are estimates and your LMI can vary depending on your personal situation.
What Affects the Cost of LMI?
There are a few factors that can affect how much LMI you’ll pay. The lender will consider all of them in the risk assessment of your application.
What’s the Size of the Loan?
The more money they lend to you, the bigger the risk. Every loan they give out is an investment in you paying it back with interest, and if you were to default on the loan, they’d probably take a loss. So, the higher the potential loss, the higher the LMI.
How Much is the Deposit?
If you’re getting a home loan with less than a 20% deposit you will probably pay LMI. And the smaller your deposit, the more you’ll pay. This is because the more you pay upfront, the less the lender has to lose.
Is The Property to Live in or an Investment?
Property investors often avoid paying for LMI simply because they have collateral or a deposit. They can do this by utilising their home’s equity, which you can find out more on by reading What is Equity in Property & How Can I Use It? Or by using their superannuation: Can I Use my Super to Buy an Investment Property? But, it’s not the only reason lenders will sometimes charge less LMI for an investment property.
Some lenders and insurers will give you a different LMI because you’re using the property to make a profit. It’s considered to be less of a risk and some insurers will charge less in these cases.
What is Your Employment Status?
Your current employment status may influence the price of your LMI. If you have full-time employment, you’re more likely to get a better LMI, compared to someone with casual employment.
The Insurer Chosen by the Lender
The price you’ll pay for LMI will also change depending on who the insurer is. Unfortunately, you won’t have much control over this, but it’s something to consider if you’re looking at multiple lenders during the home loan process.
Here at No1 Property Guide, we have years of experience helping renters become homeowners. You can rest easy knowing our New Home Consultants will find you the best home loan for your no or low deposit house and land package. Just fill in our pre-qualification form and our New Home Consultants will guide you along your homeownership journey today.
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How Do I Avoid Paying for or Reduce the Cost of LMI?
There are a couple of ways you can minimise the cost of the LMI or remove it completely. By effectively using these tactics you can save thousands on your mortgage.
Increase Your Deposit
When you apply for a home loan the banks will typically require LMI for any deposit under 20%. Increasing your deposit will reduce the cost until it gets to 20% when you no longer need to pay for LMI.
Have a Guarantor
A guarantor is someone responsible for the repayment of the loan if the original applicant doesn’t make the payments. Having a guarantor reduces the risk of losing money if the mortgage goes into default. For further details on how a guarantor works, read our article How a Guarantor Home Loan Can Help Get You Into the Property Market.
The First Home Loan Deposit Scheme
If you’re a first home buyer, you might be eligible for the First Home Loan Deposit Scheme. With this scheme, you can apply for a mortgage with a 5% deposit without needing to pay for LMI. The government essentially becomes the guarantor for the additional amount needed to get to 20%. For a complete rundown of this scheme read First Home Loan Deposit Scheme – Everything You Need to Know.
The answer to the question of how much is LMI isn’t straightforward, and it’s dependent on a lot of factors. But there’s one thing you can be sure of, if you get your new home with No1 Property Guide, you can be assured your homeownership journey will be as smooth as possible.
Thousands of renters have trusted us to get them into their new home, and now they’re enjoying life as a homeowner. They never thought they could own their own home, but after filling in our pre-qualification form, a whole new world opened up to them thanks to Darren’s no or low deposit new home system. Discover your factual options and get into your new home today.
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