Lenders Mortgage Insurance: Understanding Your Options

Let's dive into Lenders Mortgage Insurance (LMI) – a financial tool that's neither villain nor hero, just another piece of the home-buying puzzle. 

What Exactly is LMI?

LMI is a type of insurance that protects lenders when borrowers have a smaller deposit. It's not about protecting you – it's about giving banks confidence to lend to you in case you miss your repayments. It is often applied when you're coming in with less than a 20% deposit.

The Practical Breakdown

Typically, LMI is calculated as a percentage of your loan amount. The amount will vary depending on the lender. Sometimes LMI can be seen as a barrier, sometimes it's a bridge into homeownership.

Potential Paths to Minimising or Avoiding LMI

Some paths can help you sidestep or reduce LMI:

1. Professional pathways

Certain professionals can get special consideration through some lenders. They include:

- Doctors

- Lawyers

- Accountants

- Veterinarians

- Some healthcare professionals

2. Government Support Schemes

The First Home Guarantee Scheme enables eligible first-home buyers to purchase with as little as a 5% deposit without paying LMI with the Government ‘guaranteeing’ the remainder of the deposit. Other schemes include the Regional First Home Buyer Guarantee and the Family Home Guarantee. 

The Government also recently announced a Help to Buy scheme where the Government provides an equity contribution to eligible home buyers with a minimum 2% deposit.

3. Guarantor

A guarantor is usually a family member that offers their own assets (usually their home) as security for your loan. This means they are liable should you not meet your repayments. It can help you purchase a home with a lower deposit without paying LMI.

When LMI Might Make Sense

Sometimes, paying LMI can be a strategic move to help you get into the market sooner. This is particularly useful when property prices are rising quickly. It is a good idea to have a solid long-term plan if you do intend to purchase with a low deposit.

Weighing Your Options

LMI isn't inherently good or bad. It's a financial tool with trade-offs:

Potential Advantages:

- Enter the property market sooner

- Purchase with a smaller deposit

- Avoid continuing to rent

Potential Considerations:

- Additional upfront cost

- Increases your loan amount

- The insurance has no direct benefit to you as the borrower

The Balanced Approach

The goal isn't to see LMI as a friend or foe, but as a potential option. Sometimes avoiding it makes sense. Sometimes paying it is the right strategic move.

Your best bet? Run the numbers. Compare:

- Cost of LMI

- Potential property value increases

- Rental costs

- Your personal financial goals

Pro tip: A good mortgage broker can help you navigate these nuanced decisions.