Buying a home is a huge milestone, but the costs can feel overwhelming. This is especially the case if you're thinking about lenders mortgage insurance (LMI). You might wonder: "Do I really need to pay it?" or "Is there a way around it?". These are common questions among first-home buyers – and fortunately, there are options. Avoiding LMI can seem like a big challenge, but with the right approach, it's possible. Let’s explore what LMI can mean for you as a homebuyer and how you can avoid paying it without a 20% deposit.

What is lenders mortgage insurance (LMI)?

Lenders mortgage insurance (LMI) is a fee that protects the lender if you can’t repay your home loan. It’s required when your deposit is less than 20% of the property’s value.

LMI can feel like just another cost when you’re already dealing with so many home-buying expenses. The idea of paying extra on top of your deposit and loan repayments might feel frustrating as it doesn’t directly benefit you as the buyer.

However, LMI plays an important role in the home loan process . Although LMI protects the lender, not you, it’s a way for buyers with smaller deposits to still qualify for a home loan. Without LMI, many first-time buyers might need to save for much longer to enter the market.

The cost of LMI depends on your loan amount and deposit size. It can add thousands to your loan, and you’ll likely pay interest on it over time. No-one wants to pay a fee without a direct benefit, but it’s often the trade-off for buying with a smaller deposit.

Understanding how LMI works can help you decide whether to avoid it or factor it into your home loan plan.

Why is LMI necessary?

From the lender’s perspective, a lower deposit means there’s less equity in the property. This makes the loan riskier, as property values can fluctuate. LMI seeks to offset this risk, allowing lenders to offer loans to buyers with deposits under 20%.

Without LMI, many buyers wouldn’t qualify for a loan unless they saved a much larger deposit. It opens the door for more people to enter the property market sooner. While it’s an extra cost, as we mentioned above, LMI makes homeownership more accessible for buyers without a full 20% deposit.

What are the consequences of paying LMI?

Like any financial product, signing up for LMI can come with its share of risks. Let’s break down the key consequences.

Added cost to your loan

One of the most immediate effects of LMI is that it adds to your overall loan amount. As we touched on earlier, since LMI is often included in your loan, you don’t just pay it upfront – you also pay interest on it over time. This can significantly increase the total amount you end up repaying over the life of your loan.

How LMI is calculated

Lenders mortgage insurance is calculated based on your loan amount, deposit size, and loan-to-value ratio (LVR) . The smaller your deposit, the higher your LMI premium. As a hypothetical example, if you’re buying a $600,000 home with a 10% deposit ($60,000), you may need to borrow, say, $540,000. With an LVR of 90%, the lender’s risk is higher, and your LMI premium could be around $8,000 to $10,000.

It’s important to note that LMI rates can vary between lenders, so it’s worth comparing before making any decisions.

Higher long-term interest payments

Because LMI is often added to your loan, you’ll be paying interest on it for the full term of the mortgage. This means that while the initial insurance premium might seem like a one-time cost, its impact stretches over the life of the loan.

With a $10,000 mortgage insurance premium added to your loan, and if your loan term is 30 years at a 5% interest rate, you’d pay an additional $9,300 in interest on the LMI alone. This brings the total cost of LMI to nearly $20,000.

Weighing the costs and benefits

Understanding the long-term financial impact of LMI is important. While it helps you buy a home sooner, it does increase the cost of your loan. In some cases, the cost of LMI might be outweighed by the benefits of getting into the market sooner, particularly if house prices increase faster than you can save. Whether or not it’s worth paying LMI depends on your financial situation and risk tolerance, the current property market and how long you expect to stay in your new home. For further clarity on any of these points, consider speaking with a financial adviser.

How can I avoid LMI without a 20% deposit?

There are several ways to avoid paying LMI, even without a 20% deposit . Here’s a brief overview of the main strategies you can explore.

First Home Guarantee Scheme

The First Home Guarantee Scheme helps first-time buyers avoid LMI with a deposit as low as 5%. The government guarantees part of your loan, reducing the lender’s risk. This scheme has eligibility requirements, so check if you qualify.

Guarantor loans

A guarantor loan allows a close family member, often a parent, to offer their home or savings as security for your loan. This can help you avoid LMI, but it comes with risks for the guarantor, as they’re responsible if you can’t make repayments.

Low-deposit home loans

Some lenders offer low-deposit home loans, allowing you to buy with a smaller deposit, such as 5% or 10%. While you can avoid a large upfront deposit, you may still need to pay LMI unless combined with other strategies like a guarantor or government scheme.

Negotiating with your lender

You may be able to negotiate with your lender to waive or reduce LMI. If you have a strong financial background, such as a high income or stable employment history, lenders may consider this a lower-risk factor. They may also offer incentives, especially if you’re a repeat customer or taking out a larger loan. It’s worth chatting with your lender to see what options they can offer.

Knowing these strategies and whether they apply to your situation can help you decide the best path to take for your home loan.

How can I build a bigger deposit faster?

If you’re looking to avoid LMI by saving a larger deposit, there are a few ways to build your savings faster. While saving 20% might seem daunting, it can be achievable with the right strategies. Here are some strategies you can consider to potentially save money in the long run:

• Government grants and schemes: Take advantage of government schemes like the First Home Super Saver (FHSS) Scheme to boost your deposit. This scheme allows you to use superannuation contributions to save faster by taking advantage of tax benefits.
• Consider a less expensive property: It's an irritating strategy to consider, but if reaching a 20% deposit on your ideal home feels out of reach, consider looking at less expensive properties. A lower purchase price reduces the deposit required, helping you hit the 20% target sooner.
• Budgeting and automating savings: Setting up an automatic savings plan can help you consistently add to your deposit. By reviewing your expenses and cutting unnecessary costs, you can free up more money to save each month. Automating the process can make saving easier by using regular contributions without requiring constant attention.
• Selling assets: If you own other assets, like a car or investment shares, you could consider selling them to grow your deposit faster. It’s a personal decision that can make a big difference in getting into the property market sooner.
• Other financial assistance: IF you're fortunate enough to have access to it, family support can also play a role in building a larger deposit. Some buyers receive financial gifts or loans from parents to help boost their savings. Be sure to document any family contributions to avoid confusion with your lender.

Or, if you have more time to save, investing for a home deposit could help you grow it faster. By investing in shares or ETFs, your money may earn higher returns than a standard savings account. Remember that investing comes with risks, so it’s essential to consider your timeline and risk tolerance. If you’re comfortable with potential ups and downs, this approach could potentially boost your deposit over time.

Pros and cons of avoiding LMI

Avoiding LMI may save you money in the long run, but be sure to weigh both the benefits and potential downsides. Let’s look at some key factors to consider.

Pros of avoiding LMI

• Lower overall cost : Without LMI, you’ll avoid adding thousands to your loan and won’t pay interest on the insurance premium over time.
• Better loan terms : A larger deposit could lead to more favourable loan terms, such as lower interest rates , reducing your repayments.
• More equity : Starting with a bigger deposit gives you more equity in your home from the beginning, providing greater financial security.

Cons of avoiding LMI

• Longer time to buy : As obvious as it sounds, saving a 20% deposit takes time.
• Missing market opportunities : Property prices can rise faster than you can save, meaning the home you want now might be more expensive later.
• Opportunity cost : If you delay buying to save a larger deposit, you may miss out on other financial opportunities, like investing or moving into your dream home earlier.

Weighing these pros and cons can help you decide whether to avoid LMI or pay it to enter the market sooner.

Is avoiding LMI right for me?

Deciding whether to avoid paying lenders mortgage insurance or accept it comes down to what works for you. It’s about balancing short-term affordability with long-term financial goals. If you’re eager to enter the market sooner, paying LMI might be worth considering. But if you have time to save, building a larger deposit could save you money over the long term.

Every situation is different. What works for one buyer might not work for another. Consider consulting a mortgage broker or financial adviser for personalised guidance based on your circumstances and goals.

Your home loan, your choice

Avoiding LMI can make a big difference to your long-term financial situation, but it’s not the only factor to consider when buying a home. Whether you pay LMI or find a way around it, the key is making a decision that suits your financial position and future goals. Remember to take your time, explore your options, and make the choice that feels right for you.