How Lenders Mortgage Insurance can help get your home sooner

What if there was a way to buy a house without a 20% deposit.

  • 31 March 2020

    Couple relaxing on couch while moving into new home

    When it comes to buying your first home sooner, saving a 20% deposit can seem like a stretch. 

    So, what if there was a way to make a house purchase without a 20% deposit. If you’ve crunched the numbers and know servicing a loan is achievable, but gathering that initial saving for a house is a hurdle, it’s time to explore Lenders Mortgage Insurance.

    It takes single income Key Workers (i.e. fire and emergency services workers, teachers, and nurses) up to three times longer than the general population to save a 20% deposit.
    The Deposit Gap Dilemma report (2019)

    What is Lenders Mortgage Insurance?

    Lenders Mortgage Insurance (LMI) is an insurance policy that protects the lender. If a borrower can’t afford to make their home loan repayments, LMI ensures the lender (i.e. your bank) doesn’t suffer any financial loss.

    LMI does not protect the borrower – it’s a safety net for the lender.

    For example, if a borrower defaults on their loan, and the bank can’t recoup the unpaid value of that mortgage when selling the house, it can turn to its LMI policy to make a claim and make up the difference.

    How does LMI help me buy a home?

    With LMI as their protection, banks can feel more comfortable lending larger amounts and approving more loans for those on the house hunt.

    By reducing the lender’s risk with LMI, you can get into your first home sooner with as little as a 5% deposit.

    A smaller deposit can also open up your property options. More expensive houses may fit your budget with LMI considered than without LMI.

    This can be a big help for 60% of Australian Key Workers in the community such as Fire and Emergency Services workers who are finding it tough to save a 20% deposit with rising house prices, according to The Deposit Gap Dilemma report.

    60% of Key Workers said ‘saving a deposit’ was a major barrier to buying a home.

    Particularly in the inner city suburbs of Sydney and Melbourne, where dense population requires a demand for Key Worker services, it can be a stretch to save a deposit for a median free-standing home worth $973,664 in Sydney and $778,649 in Melbourne (Dec. 2019).

    Crunch the numbers

    Costs involved with LMI

    Different lenders may have different rules, but generally if you’re falling short on the desired 20% deposit, your lender may see you as a potential risk and require you to pay Lenders Mortgage Insurance.

    This cost is a one-off fee that can be paid upfront or added to your home loan. When added to your home loan you’ll be paying interest on this over the lifetime of your loan.

    The average LMI fee is $6,200, but this can vary from lender to lender, and be affected by factors such as how much you’re borrowing, what your employment status is, and whether you plan on living in the home or buying it as an investment property. Ask your lender for details on what this fee will look like.

    The price of LMI

    How much LMI you’ll pay depends on the cost of the property and the size of the deposit you have saved. Premiums payable listed below are for first home buyer, owner-occupiers borrowing with a loan term of up to 30 years. Premiums quotes are taken from the Helia LMI premium calculator based on up-front premium payment.

    Cost of property 5% deposit 10% deposit
    $500,000 $14,872 $8,680
    $700,000 $27,974 $15,498
    $900,000 $35,931 $19,926
    $1,000,000 $39,924 $22,140

    Important LMI considerations

    You can’t transfer an LMI policy from one lender to another.

    If you decide down the track to refinance your home loan to find savings, you may be required to pay a new Lenders Mortgage Insurance policy if you haven’t had the chance to build up equity in the property.

    Low equity may mean you’re borrowing more than 80% of the property value again with another lender, so they too will be seeking their insurance protection. Refunds aren’t a given.

    The Lenders Mortgage Insurance fee you’re charged by your lender may be partially refunded if your loan is terminated within the first two years.

    Alternatively, this option may not be available to you if your lender has applied a larger up-front discount on its LMI premium for you (instead of the refund option).

    In both instances, read your lender’s policy carefully so you understand what applies. 

    How to avoid LMI

    Not having to pay an extra fee on top of your loan can be attractive, but waiting to grow a home loan deposit isn’t necessarily the best option. There may be other ways to avoid or reduce LMI you haven’t considered.

    • Get a family member to be guarantor

    This is the act of having a family member provide their own savings and assets as security for your loan. The guarantor is not the borrower. If for some reason you can’t pay your mortgage, the responsibility to make payments falls on the guarantor.

    • Apply for the Home Guarantee Scheme

    The purpose of the First Home Guarantee is to support eligible first home buyers to enter the housing market sooner. 

    It does this by allowing NHFIC to issue guarantees for eligible loans to first home buyers with as little as 5% deposit without having to pay LMI if they meet certain eligibility criteria.

    Finding your home, sooner

    If you’re finding that saving a 20% deposit for a home loan is out of reach, Lenders Mortgage Insurance could help you get a foot on the property ladder sooner. By weighing up the costs and considerations with your own salary and budget plans, this option may be the right fit for your financial situation.

    Next steps?

    For more information on buying your first home visit our home loan resource centre or if you would like to speak to a Lending Specialist, our team is here to help.

    Speak to a Lending Specialist

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