Lenders mortgage insurance (LMI) is one of several unexpected costs you might face when buying a home. And it can be a significant expense.

For example, if you buy a property for $750,000 and put down a $100,000 deposit (thereby borrowing $650,000), you could be charged $7,800 in LMI premiums (as per Your Mortgage's LMI Calculator).

So, you might be interested in whether or not you actually need to pay up. While many borrowers will likely find LMI premiums are inescapable, many more might be able to avoid the cost.

What is Lenders Mortgage Insurance (LMI)?

LMI protects a lender from realising a loss in the event a borrower were to default on their mortgage.

If a borrower can't meet their mortgage repayments, their lender will take ownership of their property. If that borrower has paid LMI and the outstanding value of their home loan exceeds the value of their property, the LMI provider will step in and cover any loss the lender would otherwise bear.

Loans that are considered a higher risk of default generally have higher LMI costs attached.

Typically, a loan-to-value ratio (LVR) of 80% or more is the trigger that sees a lender demand a borrower pays LMI. Basically, if your home loan is more than 80% of the total value of your property, you will likely be charged LMI. Those with a large enough deposit or who have built up enough equity to boast an LVR below 80% are generally safe from LMI charges.

Are you eligible for an LMI waiver?

In some cases, borrowers with an LVR of more than 80% can still avoid LMI. Common scenarios include:

  • Borrowers employed in certain professions (medical doctors, for example) can be exempt from LMI

  • Some lenders have special products designed to help high LVR borrowers avoid LMI

  • First home buyers can often turn to government schemes that eliminate the requirement for LMI

What about LMI discounts?

Some lenders offer discounted LMI premiums to certain borrowers. NAB, for example, offers some borrowers a 5% discount on the cost of LMI if their property meets certain sustainability criteria.

If you think you're going to be up for LMI, it might be worth shopping around to see if you can get a good deal.

Can you get an LMI waiver due to your profession?

Some lenders offer LMI exemptions to borrowers employed in certain roles or fields - generally those deemed to be at low risk of redundancy or unintended unemployment. For instance, essential workers are less likely to lose their job and can probably expect to find work easily.

These prominent Australian lenders are among those offering LMI waivers to select professionals:

  • Westpac
    Westpac offers an LMI waiver to borrowers with LVRs of up to 90% LVR if they belong to certain medical professions, including physiotherapy, psychology, veterinary science, nursing, or midwifery. Some professionals, such as hospital doctors and specialists, can borrow with an LVR of up to 95% without paying LMI.

  • ANZ
    ANZ provides LMI waivers to eligible professionals in the medical, accounting, or legal industry. To qualify, you'll need to be a current member of a specified institute in your field.

Do you qualify for a no-LMI home loan product for high-LVR borrowers?

LMI can be a significant barrier to home ownership. Inevitably, some entrepreneurial lenders have created innovative products that circumvent the need for the insurance. If you're a borrower with a deposit of less than 20%, these alternative options might be worth your attention.

OwnHome: Deposit loans

CommBank-backed fintech OwnHome essentially offers deposit loans, allowing borrowers to finance up to 20% of their property's value separately from their home loan. The OwnHome loan must be used in conjunction with a standard home loan from a participating lender (ING and Macquarie currently recognise OwnHome's deposit loans).

So, if your deposit is equivalent to 2% of the value of the home you want to buy, you could borrow 80% of its purchase price from Macquarie and the remaining 18% from OwnHome. This way, Macquarie wouldn't charge you for LMI.

There are downsides to using OwnHome, however. The deposit lender charges what it calls a 'low deposit premium' of up to 2.2% of the property's value on top of the loan, though this is generally less than what the equivalent LMI premium would be. Additionally, the interest rate on an OwnHome deposit loan is typically higher than that of a standard home loan, so it's sensible to run the numbers yourself to see if you'd come out ahead by turning to the product.

Read more: What is OwnHome?

Sucasa: High LVR, No LMI Home Loans

Sucasa (as in 'mi casa, su casa') offers LMI-free low deposit home loans.

Unlike OwnHome, Sucasa home loans can finance as much as 95% of a property's value, so there's no need for a second lender.

Sucasa home loans are basically two mortgages in one. One loan represents 80% of the property's value, while the second funds the portion of the loan above the 80% LVR mark (at a higher interest rate). Both loans are paid off simultaneously.

Like OwnHome, Sucasa home loans are geared towards borrowers with little savings and a solid income.

How to avoid LMI as a first home buyer

If you're a first home buyer (or even if you're not) there are other possible options that could help you to avoid paying LMI, even if you're struggling to scrape together a large enough deposit.

Get a guarantor

Adding a guarantor to your home loan sees the 'guarantor' - generally a close friend or family member - putting forward some of their equity as extra security. If the borrower later can't repay their loan, it becomes the responsibility of the guarantor. If they don't, the lender can take ownership of the equity they used to guarantee the loan, which is typically another property.

This provides a lender with extra protection, often negating the need for an LMI premium.

Explore government assistance

The Home Guarantee Scheme can also help budding first home owners buy property with a small deposit without paying for LMI.

It sees the federal government acting as guarantor for up to 15% of a property's value, meaning successful applicants can buy with a deposit of as little as 5% of their home's value and still avoid LMI.

The scheme includes:

  • The First Home Guarantee, which offers 35,000 places each year

  • The Regional Home Guarantee, which offers 10,000 places a year, and

  • The Family Home Guarantee which provides 5,000 places per year

Alternatively, you can investigate whether you're eligible for a first home buyer grant in your state or territory. While it may not be enough to cover the deposit in itself, a grant of, say, $15,000 may be the impetus you need to take your savings over the 20% threshold, allowing you to avoid LMI.

Read more: State-by-state guide to First Home Owner Grants

Collections: