Smashing the Misconceptions about LMI
Most people thinks only a 20% deposit will help you avoid Lenders Mortgage Insurance (LMI). What if we told you there is a way to pay no LMI even with 10% deposit?
Our expert contributor Hao Lim helped us debunk some of the myths about LMI.
- The LMI is a policy that protects you, the borrower, if you default on the loan.
While this seems to be a common misconception to 70% of households, LMI in actuality is a policy that covers your lender (or financial institution) in the event of you defaulting on your home loan. Australian banks have made LMI a compulsory condition for all borrowers who do not have a loan to value ratio (LVR) which is over 80% — or, in other words, a 20% deposit. According to statistics from the Australian Prudential Regulation Authority, borrowers have had to spend almost 500 million dollars on LMI policies on the first half of 2016. It protects the bank’s money and prevents the lender from suffering any losses if you fail to keep up with your repayments.
- The LMI premium is fixed.
LMI premium is a one-off premium payable to the mortgage insurer, but it differs according to each lender. The size of the loan, the amount of your deposit and your financial institution are all factors that affect the cost of LMI.
Rather than being fixed, it is a percentage of the loan amount and is cumulative to the loan to value ratio (LVR) — the higher the LVR, the higher the premium. Genworth Financial and QBE Limited are the two main financial institutions in the market, but some banks will have their own mortgage insurance division to insure their loans.
- The LMI is separate to the loan and must be paid in one lump sum.
Most lenders allow the insurance to be added onto the loan, paid off consistently over the loan term. In most cases, you will be allowed to make weekly payments.
For instance, a client who borrows $900,000 (90% LVR) for a $1,000,000 purchase will have an insurance premium of $23,400. Because this insurance can be capitalised onto the $900,000 loan, the end amount to be repaid is $923,400.
Here’s how you can avoid LMI.
If you do not have sufficient deposit for a purchase, which is 20% of the purchase price, there are still three ways to avoid LMI altogether.
- Looking at your occupation.
Perhaps the simplest method is knowing that some lenders will waive LMI for certain occupations. These include: medical professionals (general practitioners, hospital employed doctors, medical specialists, dentists, optometrists, pharmacists, veterinary practitioners, etc.), accounting professionals, legal professionals, mining professionals, professional athletes, entertainment professional, and so on. This waiver applies to purchases of up to $5 million at a maximum LVR of 90%, meaning you only need a 10% deposit of the purchase price. Those who have a $150,000 per annum income are eligible.
- By means of a family guarantor.
A family pledge or guarantee is where a family member becomes your guarantor, pledging part or your entire loan so that in the event you cannot make the repayments, they will be responsible. Your guarantor can use their own home’s equity as additional security for a portion of your loan amount.
For instance, a client planning to buy a $500,000 property must pay a 20% deposit of $100,000 to avoid paying LMI. The client has $40,000. The client’s parents, given that they owned their house, are able to provide a family pledge guarantee on their home for the remaining $60,000. This will bring the LVR down by 80%, so that the client will not have to pay LMI.
- Using equity in your current property, and cross collateralising.
If you have a property and you have paid most, if not all, of it off, you can use that property to draw out funds for the new purchase – namely, 20% of the purchase price. Alternatively, you could cross collateralise the current property with the new purchase and get a 100% loan.
Always be aware of the risks of lenders mortgage insurance, by making sure you know the options available to you.
This is a shortened version of an article by Hao Lim. For more information, check out the full article within issue 2 or contact Hao Lim on 0449 668 989 / hao.lim@afhouse.com.au.
Journo for ECX Magazine
