Speaking in generalities, yes, you will need to pay lenders mortgage insurance on a home loan with a 10% deposit. It can actually be a bit more complicated than that, and there are many ways to avoid the cost of LMI. Find out more about the ins and outs of LMI on a low-deposit home loan below.
When it comes to buying a new home, there are so many things to think about in the application process that lender’s mortgage insurance is rarely at the front of mind. If you’re new to the Australian property market or are a first-home buyer, you might not have even come across it.
In fact, there’s a lot more to the price of a property than the sticker price of the home. Some of the upfront costs that follow are decided by the size of your house deposit, and how much money you borrow.
In Australia, the recommended deposit on a home loan is 20% of the property’s purchase price.
If your initial deposit is lower than 20% of the purchase price of the property — in this case, 10% — you will be required to pay LMI. While this might suit your financial situation better initially, keep in mind that it can majorly impact how the loan plays out.
What is LMI? What is LVR?
LMI stands for lenders mortgage insurance. It is a fee paid to provide insure your lender depending on the size of your deposit if it is below the recommended 20% of the property value. This is why you will often hear LMI talked about in the same breath as LVR.
LVR stands for the loan-to-value ratio of your home loan. This means the loan amount as compared to the total home loan value and is often expressed as a percentage. If you have paid a 10% deposit, your LVR might be noted as 90%. If the loan to value ratio is done in tiers, yours would be LVR 90 or similar.
What this means is that with an LVR >80, you will pay lenders mortgage insurance. There are, of course, ways to minimise LMI fees while paying a smaller deposit on your home loan.
Check out our LVR calculator to see if you might have to pay LMI.
The cost of LMI
LMI can cost a lot, especially since it’s charged in relation to property value. The more expensive your property is, the more you’ll be paying. Though you can shop around with different providers, LMI premiums tend to be similar. You will also need to factor in other upfront expenses in like stamp duty and conveyancing.
If you were buying $600,000 home with a 10% deposit, you would be borrowing $540,000 (plus the interest that accumulates over the life of the loan). Depending on your lender and your circumstances, LMI would cost you roughly $13,500.
Use an LMI calculator to plug in your own figures and work out what it could cost you.
When you’re already making a major financial investment, that can make a big difference. So it’s important to know the eligibility criteria for home loans with no LMI, and the alternatives to paying LMI (while keeping your loan amount lower).
Avoiding LMI with low-deposit home loans
Since low-deposit home loans mean your lender is taking on more risk, avoiding LMI is all about demonstrating your reliability as a borrower.
This is why your occupation might mean you could allow paying no LMI. If you work as a doctor, you may be able to borrow the full value of the property while also signing an LMI waiver. This may also apply to lawyers, solicitors, engineers, surveyors, geophysicists, accountants, auditors, actuaries and more. If you work in legal, mining, or finance professions, seek professional advice about your eligibility.
It is also why you do not have to pay LMI if you opt for a guarantor home loan.
With a guarantor home loan, a family member or close loved one is using the equity on their home as collateral in case the borrower defaults. This minimises the risk for the lender, which is why you are able to borrow more money with a guarantor. As a disclaimer, this is also a significant risk for a family member/loved one to undertake, and can put stress on the relationship if you are unable to keep up with your home loan repayments.
If you receive a gifted deposit, you also won’t have to pay LMI. This happens in the case where your deposit is topped up with gifted money, so you’ll no longer be paying a 10% deposit. The lending criteria for a gifted deposit can be quite strict, so you will need to demonstrate proof of genuine savings.
The majority of people paying a low deposit on a home loan will be first-home buyers, struggling to save up a large upfront deposit. There are federal government schemes available to make this more accessible, including cutting out LMI.
Eligible first-home buyers may be able to use the first homeowners grant to top up their deposit, allowing them to make up the 20% required deposit. There are some restrictions on who can use this grant — it is only for owner-occupiers, and price caps may apply to property values.
First-time buyers may also be able to use one of the federal government’s home guarantee schemes. There are multiple schemes in effect, including one for regional home buyers and one for single parents (called the family home guarantee), but the largest is the first home guarantee (also called the first home loan deposit scheme or FHLDS).
This consists of a set number of homes dedicated to first-home buyers taking out low-deposit home loans. These cannot be used on investment property purchases and are for owner-occupier purposes only.
While this covers almost all circumstances where you will (or won’t!) have to pay LMI, everyone’s situation is different. You may want to enquire with a mortgage broker for professional advice on your financial situation.
Avoid LMI with OwnHome
For just 2% (+GST) upfront, you can get a full 20% deposit with an an OwnHome Deposit Boost Loan. Check the OwnHome upfront costs calculator to see how we stack up against bank 10% deposit home loan options.
Here's how our Deposit Boost Loan works:
Boost your deposit - Access an instant 20% deposit loan for just 2% upfront. No more saving up for years!
Say Bye to LMI - Pair it with a traditional 80% LVR mortgage.
Hello, homeowner - Find your dream home with OwnHome’s team of expert buyer’s agents.
Enjoy your home! - Knock down a wall, paint your kitchen, get a pet! While relishing in all the joys of owning a home, you’ll make regular repayments to OwnHome, just like you do for your mortgage.
Can I capitalise my LMI with a 10% deposit?
The most common way to pay LMI is to capitalise it, meaning the fee is just added to your loan amount. While this means you don’t need to pay a large lump sum upfront, you will have to pay interest on the LMI.
Generally speaking, most lenders have a maximum LVR they will accept, inclusive of capitalised LMI. So, if you’re looking for a 90% LVR loan with a 10% deposit, adding LMI to that loan amount may be possible.
Make sure you speak to your lender about their specific policies.