Do I have to pay LMI on a 10% deposit home loan?

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.
Ava Crawford
Imogen Baxter
Couple lying on their couch cuddling researching their low deposit home loan options and considering lmi

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.

Can I capitalise my LMI with a 5% 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.

FAQs

How much is LMI in Australia?

Lender’s mortgage insurance may vary depending on a few factors. These can include:

  • LVR: The higher your loan-to-value ratio, the more LMI you may be set to pay. This is because higher loan amounts tend to be riskier for home loan lenders.
  • Loan amount: The more money you borrow, the more you may pay in LMI. Bigger loans tend to have longer loan terms and higher monthly repayments, so lenders may require higher levels of LMI.
  • Investor or owner-occupier: Some lenders may see owner-occupiers as low risk and therefore charge a higher premium to those purchasing investment property.
  • Employment status: If you are not employed full time, you may face higher LMI premiums and be viewed as higher risk.
  • Profession: Certain professions may be able to get a low deposit home loan without paying LMI. These tend to be medical professions (like doctors and nurses), or those in legal, finance, engineering and accounting professions.
  • Provider: There are multiple LMI providers on the market, and their premiums will vary. It might be worth shopping around to find an option that works for you.

Some lenders will also apply discounts to LMI for first home buyers, for example.

Why do I need to pay LMI?

Lenders mortgage insurance for your lender, not you. LMI is charged to protect the provider for riskier loans, like ones with a higher loan-to-value ratio. These loans may also attract higher interest rates due to their higher level of risk.

What is the minimum deposit you need to avoid LMI?

In general, 20% is the minimum deposit required to avoid paying lenders mortgage insurance. There are exceptions above particularly if you use the first home owners grant or a gifted deposit to top up a smaller deposit

Which careers are exempt from paying LMI?

LMI is not required for those in certain occupations, such as doctors, lawyers, barristers, solicitors, miners, engineers, surveyors, geophysicists, accountants, actuaries and more. If you work in the medical, mining, legal or financial sectors, it may be worth investigating whether you need to pay LMI.

Is LMI the same as mortgage protection insurance?

LMI and mortgage protection insurance are different things. While lenders mortgage insurance protects the provider if you are unable to make your mortgage repayments, mortgage protection insurance is something you might take out to protect yourself against that risk.

How can I bring down the cost of LMI?

If you are committed to using a low-deposit home loan and paying LMI, there are always options to bring costs down.

While LMI might be similar from provider to provider, it is still worth comparing options on the market. Some LMI providers offer discounts on LMI premiums to certain home loan providers. If you are curious about this, you may want to enquire with a mortgage broker.

You may also choose to opt for a home loan with a cashback offer attached. While this will be a one-off payment, it is often several thousand dollars and can be used to assist in your payment of LMI. Just make sure the home loan appeals to you outside of the cashback, as you’ll be making repayments on it for the full loan term.

Are there other low-deposit home loan government schemes?

Other than the first home guarantee, there are other schemes run by state and federal government to ensure housing for certain groups.

The family home guarantee sets aside housing for single parents. These can have deposits as low as 2% of the property value.

There is also a regional home guarantee for buyers in rural areas, looking to purchase residential property outside suburban postcodes in major capital cities. These require a 5% minimum deposit and operate in the same way as the first home guarantee.

The only assistance for those in Sydney or Melbourne might be the first home owners grant, but this also operates differently in each state. For example, in NSW it is only a $10,000 grant, while in Tasmania you may be able to receive as much as $30,000.

Disclaimer
This article is intended to be general in nature and is not personal financial product advice. It does not take into account your objectives, financial situation, or needs. In particular, you should seek independent financial advice and read the relevant product disclosure statement (PDS), or other offer documents before making an investment decision in relation to a financial product (including a decision about whether to acquire or continue to hold).
Prepared by OwnHome Services Pty Ltd ACN 664 492 059. This information does not take your personal objectives, circumstances or needs into account. Always read the disclosure documents for products and services before deciding on a product or service, and consider seeking independent legal, financial, taxation or other advice for your unique circumstances.
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