Lender’s Mortgage Insurance or LMI is one of the dreaded costs of buying a property. It can cost home buyers tens of thousands of dollars on top of the initial home loan borrowings. However, not everyone will have to pay Lenders Mortgage Insurance.
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What is Lender's Mortgage Insurance?
Lender’s Mortgage Insurance (LMI) is an additional cost required by lenders and banks when homebuyers don’t have a big deposit. When a home buyer applies for a home loan, the lender will calculate their loan to value ratio. If the figure is higher than 80%, the borrower will have to pay Lender’s Mortgage Insurance premium. That is unless you qualify for an LMI waiver.
Why do lenders require Lenders' Mortgage Insurance?
LMI protects lenders and banks against high-risk borrowers. If the loan amount is higher than 80% of the home’s purchase price, you are considered high risk and asked to pay LMI. The belief is that if you have a small deposit, it suggests that you aren’t in a solid financial position. Therefore, the lender thinks you’re at a greater risk of defaulting on your home loan repayments.
Those with a larger deposit, comparatively, prove their ability to save money. They’re low risk and will rarely default.
If the borrower defaults on their home loan repayments but has an LMI premium, the mortgage insurer will repay the loan amount.
How do I pay LMI?
There are two ways of paying LMI. Firstly, you can pay it upfront. However, as this is a huge cost, few have the funds to do so. This is particularly true of those with small deposits – it’s unlikely you can pay LMI fees in one lump sum.
Therefore, specific lenders allow borrowers to capitalise the LMI on their home loan. Accordingly, the LMI payments are added to the loan amount, and you pay interest on it. If you owe $10,000 in LMI fees, this could add an extra $3,488 in interest to a 30-year loan.
How is Lenders' Mortgage Insurance calculated?
There are two leading mortgage insurers in Australia: Genworth Financial and QBE LMI. Most lenders will work with one insurer exclusively. However, some lenders have their own insurers. Each calculates LMI slightly differently. It depends on the following factors
- Size of the loan
- Deposit amount
- Loan type
- Investment property or residential property
- Borrower’s employment status
For example, if someone wanted to borrow $450,000 with a deposit of $50,000, their loan to value ratio would be 90%. To calculate the LVR, divide the loan amount by the purchase price. In our scenario, the property is worth $500,000. The deposit is only 10%. Therefore, the lender would request you pay mortgage insurance.
You can use the fee estimation calculators on Genworth Financial and QBE’s websites to determine how much LMI you should pay. Using the Genworth Financial LMI calculator for our example reveals that the borrower would have to pay $9,644.32 on a 30-year loan. This is equivalent to $181.57 in monthly repayments.
The actual LMI cost might differ from the calculated estimate.
Who can access Lenders' Mortgage Insurance waivers?
Luckily, not everyone has to pay LMI. Lenders typically offer higher amounts of money to low-risk borrowers. Depending on your occupation, the lender might use more than the deposit amount to determine your risk level. Certain professions are deemed high income and, therefore, low risk. As a result, lenders offer loans with higher LVR to some professionals without requiring LMI or with LMI discounts.
Find out about the LMI waiver for professionals.
Some medical professionals qualify for an LMI waiver on loans up to $4.5 million at 100% of the property value. This means that you wouldn’t need any deposit to buy a house. Medical professionals that qualify are
- General practitioners
You must also be a member of an accepted industry organisation, such as the Australian Medical Association (AMA). Additionally, some lenders offer lower interest rates to preferred medical professionals. However, as no one is entitled to any specific rate, this varies from lender to lender. You might need to negotiate or ask a mortgage broker to find low-interest rates.
Similarly, some legal professionals are eligible for an LMI waiver. However, they must also be members of an accepted organisation to qualify for an LMI waiver. Judges, solicitors, barristers, and lawyers earning $150,000 manually might be able to apply for an LMI waiver. Annual earnings include your salary, rental income, and any other forms of regular income.
It’s worth bearing in mind that the maximum loan limit is $2 million at 90% LVR.
Accounting professionals can also access LMI waivers. Eligible borrowers include
- Financial managers
- Chief financial officers
Just like legal professionals, the maximum loan size cannot exceed $2 million or 90% of the property’s value. Accountants must also be members of a relevant industry body, such as the Australian Charter of Accountants.
Yearly income must be $150,000 or more, rental income included. Some lenders will lower the minimum income threshold for those working with specific industry bodies. For instance, if you work for Ernst & Young or Deloitte, the lender might accept lower income amounts.
Mining specialists are one of the highest-earning professionals in Australia. Mining specialists include
- Specialists in the resource, energy, or mining industries
- Quantity surveyors
- Mine surveyors
The maximum loan amount is $2 million with an LVR of 90%. Again, mining specialists must earn a minimum of $150,000 a year.
A professional athlete should have an accredited agent or manager to get an LMI waiver. The maximum loan amount must be $2 million or less and 90% of the property price. Again, your combined income should be $150,000 or higher.
Entertainment Industry Professionals
Entertainment industry professionals include anyone working in fashion, theatre, film, television, or the music industry with a minimum yearly income of $150,000. The maximum loan size and LVR are $2 million and 90% again.
However, the above eligibility criteria do not guarantee that you can avoid paying LMI. Most lenders will also require clean credit history, regardless of your profession.
First Home Buyers
Don’t worry if you’re not one of the above-listed professionals considered as low-risk borrowers. If you’re a first-time home buyer, then the First Home Owners Grant and First Home Loan Deposit Scheme might help you avoid paying LMI. The federal government introduced these schemes to help first home buyers get into the property market.
The First Home Owners Grant offers borrowers a $10,000 one-off payment towards the property’s purchase price. This might help first home buyers to qualify for a home loan without LMI or at least reduce the amount you pay on LMI home loans.
The First Home Loan Deposit Scheme specifically targets LMI home loans. If first home buyers don’t have a 20% deposit, this grants eligible borrowers to purchase property with a 5% deposit without incurring LMI on the home loan. It’s not a cash payment or deposit towards the home. However, it’s worth noting that there are a limited number of places on the First Home Loan Scheme.
Additionally, there are specific eligibility criteria to follow
- Maximum loan amount
- It cannot use for an investment property
Borrowers who have Guarantors
Another way to avoid paying LMI is to get yourself a guarantor. If your parents or another family member already own their own home, you could ask them to be guarantors of your home loan. In this instance, the lender will use the equity of your parents’ home as security. If you already own another house, you can use the equity on your old house as a deposit when you buy property. With a guarantor, you use their home equity.
For example, if your savings make up 15% of the deposit on your home loan, then your guarantor will only need to pledge 5%. The lender will waive the LMI entirely. Guarantor loans are worth considering if you’re unsure whether your financial situation will mean you have to pay LMI.
Benefit of LMI Waivers
The LMI waiver for professionals helps borrowers buy property without a significant deposit. As LMI waivers are offered to high pay-off customers, they’re low risk for the lender. So, professional athletes, chief financial officers, and quantity surveyors should all apply for an LMI waiver to improve their financial situation. Additionally, the LMI waiver benefits lenders too by attracting a lower-risk home buyer.
Why don't all professionals qualify for LMI Waivers?
The list of preferred professionals is eligible for an LMI waiver because they are high-income earners. Lenders view your financial situation as strong. You can borrow a large sum of money and make payments on time. The risk of defaulting on your payment is low.
Moreover, high-income earners often move in circles of other high earners. The lenders hope a positive experience will ensure borrowers recommend their services to other co-workers.
The professionals who don’t qualify for LMI waivers typically don’t earn enough income. Plus, the lender still looks at your credit score. Even if you earn more than $150,000, if you have a history of making late payments, then you might not be able to access LMI waivers.
What if I don't qualify for LMI Waivers?
If you’re not on the list of preferred professionals or don’t earn enough income, then you may be stuck with LMI. Fortunately, there are other ways you can avoid LMI.
Firstly, consider finding a less expensive property. If you cannot manage a 20% deposit on a $500,000 house, consider looking at different areas. Look for cheaper Sydney suburbs with high capital growth. If you’re buying an investment property, make sure you seek investment advice about high-yield areas.
Secondly, you could wait a bit longer before applying for your home loan. If it’s a matter of waiting an extra year to save enough for the 20% deposit, then it might be worth it to avoid the hefty cost of LMI.
Finally, remember that with a guarantor, you might save yourself plenty of money and get away with a smaller deposit.
How to apply for the LMI Waiver
To apply for LMI waivers, it’s best to consult a mortgage broker. Mortgage brokers can guide you through the home loan process. With years of experience in the industry, brokers know lending policies like the back of their hands.
How a Mortgage Broker can help you
A Sydney mortgage broker can do more than help you apply for LMI waivers. Shopping for a home loan is an exhausting, time-consuming process. A mortgage broker will do the hard work for you. With a panel of lenders at their side, they’ll know exactly who to recommend for your financial situation.
Moreover, they’ll help you present your application in the best possible light. For example, if you have a poor credit score, they will highlight the more substantial aspects of your situation to appeal to the lender. Plus, a broker’s negotiation tactics might save you thousands in interest.
Often, mortgage brokers advertise that they can get you excellent interest rates with their panel of lenders. Well, on top of this, brokers are also in the best place to negotiate rates and additional home loan features. An offset account or redraw feature could help you repay your home loan faster.
The above criteria don’t apply to every lender. There are no blanket rules that say all doctors must receive LMI waivers. The mining industry, for example, is particularly contentious among lenders. However, with a mortgage broker at your side, you’ll be in the best place to negotiate to pay LMI. You could save thousands on your mortgage.
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Can you get LMI waived?
Certain professionals qualify for LMI waivers on their home loans. Most lenders will require you to have a minimum yearly income of $150,000 and a maximum loan amount of $2 million. Avoiding paying LMI could save you thousands on your home loan.
Who qualifies for LMI Waiver?
Medical, legal, accounting, sporting, entertainment, and mining industry professionals might all qualify for an LMI waiver. First home buyers can avoid paying LMI with the First Home Loan Deposit Scheme.
Do I have to pay back the First Home Loan Deposit Scheme?
The government acts as a guarantor for up to 15% of the home loan deposit. As it is not a cash payment, you won’t need to repay this sum.