What is Lenders Mortgage Insurance (LMI) & How to Avoid It

As a first home buyer, you’ve probably come across the term “Lenders Mortgage Insurance (LMI).” But what is Lenders Mortgage Insurance (LMI) & how can you avoid it? In this post, we’ll explain everything you need to know about LMI, why it can cost you thousands of dollars, and most importantly, strategies on how to avoid paying it.

What is Lenders Mortgage Insurance (LMI)?

So, what is Lenders Mortgage Insurance (LMI) & how does it impact first home buyers? LMI is an insurance policy that protects the lender—not you, the borrower—in case you default on your home loan. If you’re buying a property with less than a 20% deposit, LMI becomes a cost you’ll need to consider. The key thing to understand is that LMI protects the bank, not you. This is a common misconception, as many first home buyers think LMI covers their loan or protects them from loss—but it doesn’t.

Let’s say you put down a 5% deposit, and the bank loans you the other 95%. If, for any reason, you default on your loan and the bank repossesses and sells your property at a loss, Lenders Mortgage Insurance kicks in to cover the bank’s financial gap.

How to Avoid LMI

Now that you know what Lenders Mortgage Insurance (LMI) is, let’s get to the more exciting part—how to avoid it. Paying for LMI can add thousands of dollars to your loan, making it less affordable. However, there are a few ways you can avoid LMI without needing to save up a full 20% deposit.

One of the most effective strategies for avoiding LMI is to use the Home Buyer Guarantee Scheme. This government-backed scheme allows eligible first home buyers to purchase a property with just a 5% deposit, without the need to pay for LMI. It’s a fantastic option that can save you a lot of money.

Benefits of the Home Buyer Guarantee Scheme

If you’re wondering what is Lenders Mortgage Insurance (LMI) & how to avoid it with the Home Buyer Guarantee Scheme, here’s what you need to know. Instead of paying LMI to a private insurance company, the government guarantees the remainder of your loan, so you can avoid LMI costs altogether. This means if you default on your loan, the government compensates the bank, not a third-party insurer.

Benefits of the Home Buyer Guarantee Scheme

  1. No LMI Costs: By participating in this scheme, you can save thousands of dollars that would otherwise go to a private lender’s mortgage insurance.
  2. Full Ownership: The property is entirely yours; the government’s involvement doesn’t mean they co-own the property with you.
  3. Lender Choice: While the number of lenders in the scheme is limited, there are still plenty of great options to choose from.

Restrictions

As with any government program, there are some restrictions. The primary one is that you cannot rent out the property while you are part of the scheme. However, once you’ve built up enough equity, you can refinance, exit the scheme, and then rent out your home if you wish.

Eligibility for the scheme is based on a few factors, such as your income and the property value. Make sure to check the full eligibility criteria to see if you qualify.

Final Thoughts

Lenders Mortgage Insurance is often a necessary evil for first home buyers, but with the Home Buyer Guarantee Scheme, you can avoid this cost and still secure your first home with a smaller deposit. Want to learn more about how to make your first home buying experience stress-free? Sign up for our free First Home Buyers Mini Course, launching in December 2024. It’s the perfect guide to help you navigate every step of the home buying journey.

Are you ready to start house hunting now? Make sure you have a fully assessed pre approval in place before you hit the open homes.