When you apply for a home loan in order buy a property, your lender will take the amount you can provide for a deposit and compare it against the value of the property you’re buying.

In doing so, it will create a percentage figure called your loan-to-value ratio (LVR), which will determine whether or not you need to pay lenders' mortgage insurance (LMI).

What is LMI?

The cost of LMI can end up being significant – sometimes tens of thousands of dollars – and it will be added to the already long list of costs associated with buying a home.

A common assumption is that LMI is designed to protect borrowers, but that’s not the case. LMI is an insurance product that protects the lender in the event you default on your home loan.

It makes sense then, that homeowners on a budget often look for ways to reduce or eliminate this cost.

Below are some of the ways you can avoid paying LMI when buying a home.

Wondering if you’ll be charged LMI and how much you could be up for? Check out our LMI Calculator

1. Provide a 20% deposit

It might seem obvious, but putting forward a 20% deposit or more – ergo, borrowing with an LVR of 80% or less – can eliminate the need for LMI.

LMI is an insurance product that protects the lender in the event that you default on your home loan.

If you can provide a 20% deposit, your lender will likely determine that you’re a lower risk borrower or that, even if you do default, it will walk away unscathed.

2. Buy a cheaper property

For the most of us, however, money doesn’t grow on trees. It mightn't be possible to pull more cash out of thin air so as to provide a larger deposit.

In such cases, you might consider buying a cheaper property.

After all, common sentiment is that the first step onto the property ladder is the hardest, and buying a property that fits your needs without being perfect could be a great way to avoid paying LMI. It could also reduce the size of your regular repayments while you build up equity in your home.

3. Turn to the Home Guarantee Scheme

The Home Guarantee Scheme sees the Federal Government essentially acting as a guarantor for a portion of a home buyer’s mortgage. This helps buyers to purchase a home with a deposit of less than 20% without paying LMI.

The scheme encompasses three guarantees: The First Home Buyer Guarantee, the Regional First Home Buyer Guarantee, and the Family Home Guarantee.

The First Home Buyer Guarantee and the Regional First Home Buyer Guarantee allow first home buyers to enter the market with a deposit of 5% or more.

Meanwhile, the Family Home Guarantee helps single parents and legal guardians with deposits of at least 2% into homeownership.

4. Use a guarantor

If you don’t qualify for the Home Guarantee Scheme, or it simply doesn’t appeal to you, you might be able to avoid paying LMI by getting someone close to you to guarantor your home loan.

A guarantor is a person who essentially promises that if you don’t make your repayments, they’ll be responsible for some or all of your home loan. Most commonly, this person is a parent or family member.

You could potentially borrow 100% or 110% of a property’s value by having a guarantor.

If you opt for this pathway, your guarantor will need to meet specific income, equity, or credit score criteria. They should also understand the risks involved as, if anything goes wrong, they’ll be liable for the amount they guarantee.

A lender might even demand a guarantor gets independent legal advice before signing on the dotted line.

5. Consider another lender

If your deposit is just shy of the 20% mark, or if costs like stamp duty and mortgage registration fees have chipped away at your 20% deposit and pushed you into LMI territory, consider switching lenders.

Some lenders have higher LVR thresholds for LMI. For instance, at the time of writing ubank allows homeowners and buyers with LVRs of 85% or less to borrow without the extra cost of LMI.

So, if your LVR is just a few percentage points off the 20% target, you could avoid paying LMI by choosing a different lender.

6. Choose your profession wisely

Banks and lenders often waive LMI for borrowers in certain high-paying or in-demand professions.

For instance, medical professionals like doctors, optometrists, and dentists might be able to borrow with an LVR of more than 80% without paying LMI with select lenders.

Some lenders, such as Westpac, extend this benefit to borrowers in women-dominated professions like nursing and midwifery, provided they have a 10% deposit saved.

Other professions, including accountants, lawyers, professional athletes, entertainment professionals, and mining specialists, may also avoid LMI as long as their LVR doesn’t exceed 90%.

Lenders view these borrowers as low-risk due to having stable and high incomes, believing they're more likely to meet repayment deadlines and less likely to default on their loans.

7. Keep an eye out for promotional offers

Finally, a lender might occasionally offer an LMI discount or waiver to encourage more first home buyers onto its home loan book.

If you’re in the market for your first mortgage, it could be a good idea to keep an eye out for these deals and others like them.

Image by Andrew Neel on Unsplash

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