Lenders Mortgage Insurance (LMI) is a one-off fee payable when borrowing more than 80 per cent of a property’s value. It’s yet another expense that can make life difficult for cash-strapped home buyers; even for a modestly priced property. This “hustler’s guide” from Home Loan Experts outlines the various ways you can reduce — or completely avoid — your LMI fee.
Australian house picture from Shutterstock
LMI can be a pain in the butt. It’s designed to protect the bank’s interests and can result in serious money woes if you default on your mortgage. As Home Loan Experts explains on its blog, if you borrowed $510,000 for a property worth $550,000, you could be paying over $23,000 upfront just to get your loan settled: not exactly small change.
The below infographic explains how to reduce or even avoid mortgage insurance altogether. Some of the advice will be unfeasible to most readers (you’re probably not going to become a doctor just to avoid an LMI fee) but there are also some viable tips that could save you a bunch of money. See for yourself!
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17 responses to “How To Dodge Mortgage Insurance Fees When Applying For A Home Loan [Infographic]”
They missed the most obvious way:
Get an off-record loan for the 20%. ie. A loan from your family, friends, bookies or crime gang.
This is lower risk for the secret lender than them going outright guarantor because their risk is capped at the 20% that they loaned you. If you have 20% deposit, most banks won’t care about your ‘savings history’, they just check your official credit record (credit cards, finance company loans, etc.) and your current earnings to ensure you can support the loan. If they ever ask where you got the money you have to tell them it was a gift.
For the first 5 years, life will be more difficult because you’ll be paying off the mortgage and the unsecured loan. Assuming you’re not paying 30% interest on your unsecured loan, this strategy will save you LMI – often about $8,000 these days.
Just don’t forget – prioritize paying off your secret loan. It will have a higher interest rate than your bank loan, and it’s a whole lot easier to replace a repossessed house than it is your kneecaps.
Oh, and never be fooled by the name “Lender’s mortgage Insurance”.
It’s not your Insurance and it offers you absolutely nothing in way of protection for non-payment. It’s a massive bank fee so they can offset the additional risk of lending to you. It is a marketing term that sounds better than “Risky Borrower Surcharge”.
The name makes sense, they’re insuring the Lender.
Two things
1) this article/infographic doesnt tell us any secrets – its just common knowledge
2) How does a corporation who makes over $5 Billion dollars of profit PER QUARTER need an additional few thousand dollars to ‘insure’ the person they are lending money to?
To offset the amount of lube they’ll need as they ride you for the next few decades.
Answer 2: Various regulations require loans to be insured when above 80%. If the lender doesn’t take an LMI policy, their cost of funding increases and your interest rates would go up as a result. Lenders want to be seen to have competitive rates, so they make sure they take the policy and of course they pass the cost onto the consumer (like everything else).
Almost all LMI in Australia is handled by Genworth and QBE.
None of the banks make $20bn profit a year. Or even half that.
No it isn’t. It’s a fee charged by the insurer, not the bank, which allows the bank to reclass the security into a higher capital tier as per Basel rules.
Risk premium is included in your rate.
When we purchased our first property we applied for a loan with Keystart. They are ran by the Department of Housing and Works (WA state government department), don’t charge any LMI and allow you to borrow up to 98% of the property value.
They do have strict lending criteria and conditions though which includes a total household income limit and lower maximum loan amount. They are a really good lender for those they are intended for.
I am not sure if other states have similar initiatives in place but worth taking a look into.
I recently purchased an apartment off the plan and have been saving like crazy to get an additional 10% of the value saved by completion just so I can avoid LMI. Not once have I heard of any discount from lenders because I am a first home buyer. Will have to check this out and shop around even more when I need to get the mortgage. Thanks for the info!
Hi, from Home Loan Experts here. Yes, this discount is available from a few insurers.
Anyway I just wanted to say that we have a bunch of articles for first home buyers but our mortgage calculators have proven to be especially helpful. Be sure to check them out if you can 🙂
https://www.homeloanexperts.com.au/home-buyer-centre/
(Yes I am plugging our own site but I really do believe that our content is that damn good!)
Lenders are required to use LMI when they lend more than 80% of the value of a property. It’s not the lenders imposing this, there’s some regulation that puts this in place. Many sources of money are required to be insured even when you borrow less than 80%, only the lender covers the cost in the interests of being competitive.
Some investors see LMI as an opportunity to make their deposits go further, acquire more property and speed up their wealth creation. It’s certainly undesirable but it can be made to work to your advantage.
When we bought our house, we looked at it this way, keep paying rent for another x months/years to get above the cut off for LMI, or get it tacked onto the mortgage and pay include it in the cost of the house. It worked out better for us to get it tacked on, our deposit pretty much covered the LMI cost and a small amount of the house price but it allowed us to buy a house sooner.
We are now several years ahead on the mortgage, should have it paid off in less than half the time. Did not notice the LMI on top the house price when we purchased, definitely don’t notice it now. Is it one way for companies to make money? Sure, but between us buying a house or not buying a house, it helped.
Thats good advice, I think that is what I am going to end up doing. Thanks mate.
(From Home Loan Experts) If you’re stilll wondering about buying now or saving and buying later then don’t forget to think about 1. the growth rate in the area, 2. how much you can save every month to avoid LMI and 3. how much interest you would earn on your savings.
After you calculate the amount then compare it to the rent you would pay until that period and the predicted price of the property.
(From Home Loan Experts here) Yep, and when you factor in increasing house prices, sometimes buying a house sooner and paying LMI is better for you than waiting.
“Lenders Mortgage Insurance (LMI) is a one-off fee payable when borrowing more than 80 per cent of a property’s value.”
So your tip to ‘dodge’ that is… save 15-20% of the property price as a deposit??
Thank you Captain Obvious.