In’s & Out’s of Lenders Mortgage Insurance

With the cost of living becoming more burdensome to Australians as a result of inflationary pressures, households are looking at various avenues to minimise expenses where possible. In combination with the cost of living pressures, the rising cost of lending is leading an increasing number of people to look to purchase property.

In previous ‘Chiefs Financial Briefs’, we have covered the main upfront costs which face homebuyers, including Stamp Duty and Lenders Mortgage Insurance. These fees add up to an extra $60,000 or more in costs on top of an $800,000 property, which leaves a significant hole in the bank account of buyers.

The light at the end of the tunnel however is that there are strategies to minimise or remove entirely these fees, eliminating the ‘wasted expenses’ that we incur. 

Main Upfront Fees When Purchasing:

• Stamp Duty which normally costs $31,070 on a $600,000 property, can be avoided by first home buyers purchasing under $600,000 and partially avoided below $750,000.

• Lenders Mortgage Insurance (LMI) which can cost around $30,000 upfront, has more opportunities to be avoided or minimised. Lenders generally charge LMI when the buyer has a deposit smaller than 20% of the property value. This is done as lenders consider loans issued in these situations as riskier, thus wanting extra compensation for the risk. Explained below are 4 current and expected strategies which allow homebuyers to

1. Minimum 20% Deposit
2. First Home Loan Deposit Scheme
3. Help To Buy Scheme
4. Guarantor Loans

Minimum 20% Deposit = Standard No LMI fees.

All homebuyers can fully avoid paying LMI fees by putting down at least a 20% deposit on the property with their loan. This happens because LMI is a way lenders ‘reduce risk’ by charging borrowers who have a small deposit, which means they require larger loans and thus have a higher chance of defaulting on that loan. As a result, if you are in the financial position to afford putting down a 20% deposit on your dream home, you will avoid paying extra fees that have no connection to the actual property. However, as mentioned above, the financial burden of affording a 20% deposit is becoming greater for more homebuyers, luckily there are more strategies to minimise LMI.

First Home Loan Deposit Scheme = 5% Minimum Deposit – Pay no LMI fees.

The Federal Government’s ‘First Home Loan Deposit Scheme’ reduces the upfront financial burden of saving up a sizeable deposit for first home buyers. This scheme removes Lenders Mortgage Insurance (LMI) fees charged to first home buyers, allowing buyers to put down a minimum 5% deposit. LMI is waivered as the government guarantees up to 15% of the property, reducing risk to the lender. First home buyers will save around $30,000 in upfront fees when utilising this scheme.

Help To Buy Scheme = Government pays for 30% of the house, avoid LMI and reduce monthly repayments.

The ‘Help to Buy’ scheme has been recently introduced by the Labor Party, who have since moved into Government in May 2022. This is a ‘shared-equity’ scheme which means the government can contribute/pay up to 30% of an existing property (40% for new) along with the buyer. The government effectively becomes a part owner of the property, resulting in reduced monthly repayments for the buyer. Importantly, eligible applicants under the Help to Buy Scheme do not have to pay costly LMI fees due to the government support, allowing the lender to view low deposit loans as less risky to them.  For a borrower purchasing an $800,000 property under this scheme in Melbourne with a 5% deposit, they could save roughly $1,000 per month compared to if they were on the first home loan deposit scheme. There is eligibility criteria and conditions to this scheme all buyers should know before applying, check out our ‘Financial Brief’ social media posts about the scheme, or reach out to us directly to learn more.

Guarantor Loans – Minimum 5% deposit, avoid LMI.

Guarantor loans are similar to the home loan deposit scheme above, however the guarantee comes from a close family member rather than the government. Essentially the family member uses their property as security for the loan, which the lender views as an extra deposit. Because of this, a common strategy is for the buyers to put down a 5%  parents to use the equity in their house to bring the deposit up to 20%, which removes Lenders Mortgage Insurance fees charged by the lender. Note the guaranteed amount is not a cash deposit, the guaranteed equity represents a deposit but the buyer will stay have to repay 95% of the property value, plus interest, given they have put down a 5% deposit. Click the link below to find out more about Guarantor Loans.

Conclusion – You have options!

There are various strategies home buyers can use to avoid or minimise paying Lenders Mortgage Insurance fees, which in the current environment of high living expenses, is becoming more necessary. Follow our socials for important market updates as well as the ‘Financial Briefs’ which give to-the-point information which people should know when looking at purchasing or refinancing. Reach out if you have any further questions or want to know how much you can borrow.

Today’s Extended Financial Brief written to you by Dylan Shipperd.