If you were to ask your parents, they would likely tell you they had to scrimp and save to cobble together their 20% deposit.
Fortunately – with the introduction of Lender’s Mortgage Insurance (LMI) – home buyers today can secure property with a much more achievable deposit. This is possible because mortgage insurance companies take on the risk in exchange for an insurance premium, allowing the bank to lend you greater than 80% of the value of the property.
LMI is determined by a range of factors, which contribute to the overall level of risk. The main factors are the size of the loan and the percentage of the property value that you wish to borrow (this is referred to as the Loan to Value Ratio, or LVR).
Any premium is generally capitalised to the loan, allowing you pay it over the term of the loan. Some lenders will allow this to be capitalised to a very high percentage, especially for First Home Buyers.
There are two main mortgage insurers in Australia – QBE and Genworth – with some of the larger financial institutions also self-insuring. As the majority of lenders deal with only one of these insurers, LMI premiums can vary quite a lot. It is important to get advice from a good mortgage broker who can help you find a competitve interest rate and a low LMI premium.
It’s worth remembering that although the bank makes you pay the cost of this insurance, it’s there to protect them – not you!
It’s also important to keep in mind that the higher the LVR of your loan, the greater scrutiny lenders and mortgage insurers will apply when assessing your application. That said, if you have had credit issues in the past, specialist lenders may still be able to assist.
Reducing your LMI Premium
Although LMI can be a great solution for some people, it is still a cost. And reducing or eliminating this cost can be attractive.
There are a number of things you can do to help reduce your premium:
- Wait Until You’ve Saved a Larger Deposit
The higher the deposit that you are able to contribute to a purchase, the lower the loan amount and LVR will be. As premiums tend to jump up significantly at the top end of the LVR scale, even a little extra in your deposit can save thousands on your LMI premium.
- Hit up Mum and Dad
Another great way to reduce or sometimes even eliminate LMI is with a gift from your parents. Most lenders will consider this as part of your deposit. However it’s worth keeping in mind that lenders generally require you to have saved up 5% of the purchase price over time (this is referred to as Genuine Savings) if you are borrowing over 85% of the purchase price.
- Find a Security Guarantor
If you are fortunate enough to have parents who are both able and willing to provide a security guarantee, you can often completely eliminate the need for LMI. This is where a guarantor offers their property as additional security on the loan. Some lenders will actually allow anybody who is prepared to help, to offer the security guarantee! Lender’s policies in this area vary greatly, so it is important to consult a good mortgage broker before deciding how to proceed.
- Go For a Lower Purchase Price
Although this may not always be an option, a lower purchase price will make your deposit becomes more significant, reducing the LVR of your loan. Negotiating harder to reduce the purchase price would have the same effect.
- Do You Qualify for a Medico or Industry Specialisation Policy?
Some lenders will allow LMI to be completely waived up to a 90% LVR for medical and even some other professionals. The criteria, including income thresholds, for qualifying for this waiver is quite high.
- Do you Qualify for an 85% No LMI Loan
It may be possible to qualify for a loan up to 85% LVR without paying any LMI. There is strict criteria when applying for this type of loan. Of particular importance is having a completely clean credit history and good conduct on all existing accounts. This type of loan generally attracts a slightly higher interest rate.
- Get an Upfront Quote Through a Broker
When taking a home loan with a lender, you will not have any control over which Lender’s Mortgage Insurance company they use. In fact, the exact same scenario can attract a wide spread of LMI premiums, depending on the lender and their mortgage insurer. By consulting a good mortgage broker, you will be able to explore the different LMI options that are available and balance this against the rates and features that each lender is offering.