How to Avoid Lenders Mortgage Insurance on a Low Deposit Home Loan

Securing a home loan with a low deposit can be a great way to enter the property market sooner. However, one of the challenges is the requirement for Lenders Mortgage Insurance (LMI). LMI protects the lender if you default on your loan, but it can add thousands of dollars to your upfront costs. This blog will provide you with practical tips on how to avoid LMI on a home loan with a low deposit.

What is Lenders Mortgage Insurance (LMI)?

Lenders Mortgage Insurance (LMI) is a one-time premium that you pay when you take out a home loan with a deposit of less than 20%. It protects the lender in case you can't repay the loan. While LMI allows you to get a home loan with a low deposit, it can be a significant upfront cost.

Government Schemes to Avoid LMI

The Australian government offers several schemes to help first-time home buyers avoid LMI. These schemes can be a great way to secure a home loan with a low deposit without the added cost of LMI.

First Home Loan Deposit Scheme (FHLDS)

The First Home Loan Deposit Scheme (FHLDS) allows eligible first-home buyers to purchase a home with as little as 5% deposit without paying LMI. The government guarantees a portion of your home loan, making it easier to get approved by a lender.

Eligibility Criteria

To be eligible for the FHLDS, you must:

1. Be an Australian citizen.

2. Be a first-home buyer.

3. Have a taxable income of less than $125,000 per year (for singles) or $200,000 per year (for couples).

4. Purchase a property that is priced below the regional price caps.

First Home Super Saver Scheme (FHSSS)

The First Home Super Saver Scheme (FHSSS) allows you to save for a home deposit using your superannuation fund. This can help you save faster and reduce the amount of deposit you need, potentially avoiding LMI.

How It Works

Under the FHSSS, you can make voluntary super contributions, which are then taxed at a lower rate. When you're ready to buy your first home, you can withdraw these contributions, plus any associated earnings, to use as a deposit.

New Home Guarantee

The New Home Guarantee is another initiative under the FHLDS umbrella. It helps first-home buyers build a new home with a low deposit and no LMI. This scheme is particularly beneficial for those looking to build their dream home rather than buy an existing property.

Eligibility Criteria

To be eligible for the New Home Guarantee, you must:

1. Be an Australian citizen.

2. Be a first-home buyer.

3. Have a taxable income of less than $125,000 per year (for singles) or $200,000 per year (for couples).

4. Purchase or build a new home that is priced below the regional price caps.

Alternative Loan Options

If you're not eligible for government schemes or want to explore other options, there are alternative loan products that can help you avoid LMI.

Guarantor Loans

A guarantor loan involves a family member using their property as security for your loan. This can help you avoid LMI and secure a home loan with a low deposit. The guarantor's property acts as additional security, reducing the lender's risk.

How It Works

The guarantor's property is used as security for a portion of your home loan. This means the lender has less risk, and you can avoid paying LMI. However, it's important to understand that the guarantor is taking on a significant financial responsibility, so it's crucial to have a clear agreement in place.

LMI Waivers

Some lenders offer LMI waivers for certain professions, such as doctors, lawyers, and accountants. If you're in a profession that qualifies for an LMI waiver, you can secure a home loan with low deposit without paying LMI.

Eligibility Criteria

To qualify for an LMI waiver, you typically need to meet specific professional and income criteria. It's important to check with your lender to see if your profession qualifies for this benefit.

Saving a Larger Deposit

While it might take longer, saving a larger deposit can help you avoid LMI. If you can save a deposit of 20% or more, you won't need to pay LMI, and you'll also benefit from lower monthly repayments.

Tips for Saving a Larger Deposit

1. Set a Budget: Track your expenses and cut unnecessary costs.

2. Automate Savings: Set up automatic transfers to your savings account.

3. Increase Income: Consider a side hustle or overtime at work.

4. Reduce Debt: Pay off high-interest debts to free up more money for savings.

Conclusion

Avoiding Lenders Mortgage Insurance on a home loan with a low deposit is possible with the right approach. By taking advantage of government schemes, exploring alternative loan options, and saving a larger deposit, you can reduce or eliminate the need for LMI. Working with a mortgage broker can also help you find the best loan products and navigate the complexities of LMI. With the right strategy, you'll be well on your way to securing a home loan with a low deposit that suits your financial situation.