Lenders Mortgage Insurance (LMI) is a type of insurance that covers a lender’s financial risk if the borrower defaults on the mortgage. You don’t generally need to pay for LMI if you can provide a 20% deposit for your home. However, if you don’t have enough saved up to pay upfront, the lender will most likely require you to pay for LMI to cover their financial risk.
The cost of LMI depends on the size of your loan. You can use an online LMI calculator to estimate how much extra you’ll need to pay for LMI when borrowing with a low deposit. Generally, the lower the deposit, the higher the amount you pay for LMI, and it can often run into thousands of dollars depending on the size of your loan. The good thing is that you can avoid paying for LMI in some situations, and it’s worth learning about these to save some money if you are taking out a low deposit home loan.
1. Check for a professional home loan discount
Lenders often provide special deals to borrowers belonging to low-risk professions, such as doctors, dentists, and accountants. If you belong to any of these fields, you may be eligible for waived LMI on your mortgage.
If you are wondering why the special treatment – the reason is simple. Lenders want to work with borrowers who are least likely to default on their mortgage. Professionals like doctors and lawyers generally have stable jobs and high incomes due to the important nature of their service. Lenders thus consider such professionals as low-risk borrowers and offer them discounts to get their business. However, lenders don’t always advertise these discounts, and you may want to speak to your broker if you think you are eligible for a professional discount to get the best possible deal on your home loan.
2. Ask your parents for help
If your parents have some spare cash, they may want to help you out by gifting some money towards your home loan deposit to help you avoid LMI costs. However, not all lenders accept gifted deposits, and those who do may have strict requirements around it. For instance, you may be required to provide a letter from your parents that states the purpose of the gift and that it’s not a loan you need to return. Most lenders will also need you to show some genuine savings in addition to a gifted deposit to qualify for a home loan. Genuine savings refer to the money saved by you from your own income over time. Having at least 5% of the purchase price in genuine savings can make it easier for you to qualify for a home loan.
If you don’t have any genuine savings, you may still be able to secure a home loan if your parents agree to go guarantor on your home loan. It means your parents will use the equity in their house to secure your loan. If the equity is enough to cover a 20% deposit, you can get a home loan without paying for LMI with some lenders. However, if you fail to make timely repayments, the responsibility to pay will fall on the guarantor. So it’s important to speak with a legal professional before getting into a guarantee arrangement so that all the parties are aware of their rights and obligations.
3. Check whether you are eligible for any government schemes
There are various government-sponsored schemes that can help you climb the property ladder without a 20% deposit and no LMI. Some states offer the First Home Owners Grant (FHOG), which is a sum of money given to first home buyers by the state governments to purchase their residence.
You may also want to check your eligibility for the First Home Loan Deposit Scheme, which is a federal government-sponsored scheme for first home buyers. Under this scheme, limited seats are available for eligible first home buyers to buy a property with as little as a 5% deposit and no LMI. There’s also the Family Home Guarantee scheme for single parents with dependents, allowing them to purchase their place of residence with just a 2% deposit and no LMI.
It’s worth noting that while the FHOG is a state grant, the First Home Loan Deposit Scheme and the Family Home Guarantee are just guarantees provided by the government to help you purchase with a low deposit. You don’t receive any money as part of the government guarantee schemes, but you are eligible to borrow a larger percentage of the property’s purchase price without paying for LMI. That’s because the government guarantees your loan, covering the lender’s financial risk if you default. However, you need to repay the loan within a maximum of 30 years, which means your monthly repayments will be higher than if you were to borrow with a larger deposit. Therefore, it’s worth assessing your repayment capacity before signing up for the scheme to avoid defaulting on your loan in the future.
4. Compare home loans by different lenders
Comparing home loan deals by different lenders can save you money in different ways. Besides securing a competitive interest rate, you may find yourself eligible to borrow more with a specific lender compared to others.
It’s a fact that all lenders have slightly different eligibility criteria for home loans, and you might be able to negotiate an LMI waiver or a discount with some lenders if you can prove stable income. A broker can help you find lenders who are more likely to lend to borrowers in a situation like yours and also help negotiate a better deal for you.
