- Lenders mortgage insurance is a one-off payment which protects the lender from any shortfall if you can't afford to meet your loan repayments.
- There are two ways to avoid paying LMI:
- Reduce your loan to value ratio by saving a bigger deposit and/or buying a more affordable home
- Arrange a family guarantee on your loan
Many first home buyers have never heard of lenders mortgage insurance (LMI) until they have saved their deposit. So what is LMI, and can you avoid this extra cost?
Lenders mortgage insurance is a one-off payment which protects the lender from any shortfall if you can't afford to meet your loan repayments. There is a misconception that LMI protects the borrower, but in fact this insurance covers the lender. It is an APRA requirement that banks hold LMI on loans where the value of the loan is high compared to the value of the property.
Depending on the size of your loan and how much deposit you have saved, LMI could cost you thousands of dollars.
Thankfully, there are two ways to avoid paying LMI:
- reduce your loan to value ratio by saving a bigger deposit and/or buying a more affordable home
- arrange a family guarantee on your loan
Reducing your loan to value ratio (LVR)
Your loan to value ratio is the percentage of the property purchase price you need to loan. For example, if you have saved a 20% deposit, your LVR will be 80%, which is the industry standard to avoid paying LMI. To reduce your LVR, you simply need to save a bigger deposit or spend less on your first home, or both.
At BankVic, we help first home buyers enter the property market sooner, with a more generous 85% LVR. This means BankVic first home borrowers only need a 15% deposit to be exempt from paying LMI.
A family member can provide a Family Guarantee on your loan, saving you thousands in LMI costs and helping you buy your first home sooner. For example, if your parents have owned their home for 20 years, they may have paid off their mortgage or be close to it. The family guarantee uses some of the value of their house as an additional security on your loan. There is no transfer of funds; the amount is simply nominated as security against your loan.
Asking a family member to guarantee your home loan is not a favour to be asked lightly. It is worth explaining to your family that, at BankVic, once 20% of the property value is paid off, we can release the family guarantee from that title. It is worth ensuring that the family member seeks independent advice prior to acting as a guarantor, so that they are aware of the risks involved.