How Do I Avoid Paying Lenders Mortgage Insurance?
It’s not uncommon for people wanting to buy a home, but don’t have ‘enough’ of a deposit saved. Strictly speaking, nothing is stopping you from getting a loan with less than a 20% deposit. Unfortunately, you have to pay something called LMI – Lender’s Mortgage Insurance which in turn increases your repayment but if the repayment works for you, then don’t let LMI stop you.
If you can avoid paying LMI, then you are ahead of those who do pay it and you are a long way ahead of everyone who puts off home ownership because they don’t have their 20% deposit.
When a client comes in without their 20% deposit, then there are four potential avenues available for them to avoid paying LMI.
Can your parents guarantee your loan?
In many cases, a home buyer can get their parents to be a guarantor for your loan. In effect what happens is that they agree to pay back the loan should the borrower default, up to the limit of the guarantee (so not the whole loan). This requires a lot of trust between the two parties to do the right thing and it’s not without its risks. Everyone needs to go into one of these arrangements eyes wide open.
When it goes right, as the property appreciates and repayments are made the equity in the property will increase allowing the borrower to refinance to a standard loan and no longer need the guarantor. Expect it to take at least 3-5 years for the equity to accrue.
Can you access the Home Guarantee Scheme?
If you qualify, then you only need a 5% deposit (or 2% if you are a single parent) and the federal government will be your guarantor. LMI avoided. Asking Mum and Dad to be the guarantor can be avoided. It’s the whole point of the scheme – to help first-home buyers who don’t have a deposit access the property market for the first time.
I’ve helped relatives, friends, and family of existing clients use the Home Guarantee Scheme quite a bit. It’s a good option while it’s there.
Do you have a generous relative?
It’s not unusual that a relative can and will give you a leg up. You might be able to work out a loan, an interest-free loan with them, or get a gift from them that will make up the balance of your deposit. If they have a lot of equity in their home – they might be willing to give it to you – it could mean they have less risk than if they were to guarantee your loan for you with the bank.
Are you a Doctor, Lawyer, Accountant, Physiotherapist, Vet or Nurse?
If you work in one of these occupations you may be able to borrow up to 90% of the property value (95% if you are a doctor) without being charged Lenders Mortgage Insurance. There are a few conditions imposed by some lenders such as a minimum income requirement.
Those are my top 4 fixes for how to avoid being slugged with LMI. If you need help finding a way to make a purchase happen without a deposit call 1300 661 211 or register online at https://www.mortgageworldaustralia.com.au/contact-us/ and we can help you figure out your options.