Lenders mortgage insurance, or LMI, is essentially an insurance premium where you pay to cover the risk of the lender who lends you money.
Their risk comes with taking you on as a borrower with a smaller deposit than the lender’s benchmark, generally 20% for most lenders. Alas, LMI, depending on the provider and deposit size, can add tens of thousands of dollars to your home loan.
Unless you can afford to pay for it up front, the charge for LMI can be included in the loan amount which makes it even more expensive as you’ll be charged interest on it.
From time to time, banks and lenders offer discounts or special deals on LMI which can help you avoid the hefty cost. Otherwise, there are limited ways you can get out of paying it.
How to avoid paying LMI
There are generally only a few ways borrowers can avoid LMI, which can include having:
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a large deposit,
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a chunk of equity in another home,
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a guarantor, or
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a trustworthy profession (e.g. doctors, lawyers, engineers, and accountants are often exempt from paying LMI).
However, another way is through a special offer or deal. Australia’s competitive home loan market means lenders compete with each other in offering enticing discounts and promotions to sign up good borrowers.
Sometimes, these deals include discounted or waived LMI for those with 15% deposits.
As at September 2024, only a couple of lenders are advertising a no LMI home loan deal but keep in mind, ‘special offers’ can begin - or end - at any time.
ubank
Ubank, the digital-only offering of National Australia Bank, waives LMI on its home loan products if the borrower has a 15% deposit - or 85% loan-to-value ratio (LVR).
LMI is waived across ubank’s Neat variable and Flex home loans for owner occupiers making principal and interest (P&I) repayments. Flex home loans offer both variable or fixed options (for one, two, three, and five years).
According to ubank, owner occupiers can save $5,000 in insurance costs on a loan of $500,000 by saving for a $75,000 deposit (15%) instead of $100,000 (20%).
Our lenders mortgage insurance calculator can give you a rough idea of the LMI you’ll be up for based on the amount you’ve saved for a deposit and the property value.
It’s also worth considering that the interest rate on ubank home loans jumps considerably from 80% LVR loans to 85% LVR ones, meaning additional interest payments may eat into what you’re saving by not paying LMI. It’s wise to do some calculations based on your own circumstances to see what’s best for you.
Westpac LMI waiver
Westpac waives LMI to certain registered healthcare practitioners and emergency service workers with 5-10% deposits.
The big bank has a $90,000 a year minimum income requirement for allied healthcare workers with a 10% deposit. The long list of professions includes chiropractors, midwives, registered nurses, physiotherapists, pharmacists, and vets.
Dentists, GPs, hospital-employed doctors, and medical specialists with a 5% deposit don’t need to meet any minimum income requirement to be eligible.
Lenders across the Westpac group, including St George, BankSA, and Bank of Melbourne, also extend LMI waivers. Eligible professions and requirements should be checked with each lender.
What else is there?
Some of the major lenders also advertise LMI waivers to certain professionals, including ANZ, but if you are in an esteemed occupation, you may find lenders are willing to be a bit more flexible on LMI on a case-by-case basis.
Mortgage brokers can also sometimes get access to broker-only offers through their lending partners so if you’re using a mortgage broker, it could pay to speak with them directly.
Home Guarantee scheme
Another way to avoid paying LMI is to see if you qualify for a low deposit, no LMI home loan under the federal government’s Home Guarantee Scheme.
The three guarantees that form this scheme are:
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First Home Buyer Guarantee (FHBG), supporting eligible buyers to purchase a home with as little as a 5% deposit
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Regional First Home Buyer Guarantee (RFHBG), supporting eligible regional buyers to purchase a home with as little as a 5% deposit
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Family Home Guarantee (FHG), supporting eligible single parents to purchase a home with as little as a 2% deposit
You have to meet eligibility criteria, including income thresholds, to qualify for home loans through the scheme's participating lenders and places are subject to annual caps.
Essentially, the Home Guarantee Scheme sees the government act as a guarantor on your loan so you can avoid paying LMI, even with a low deposit.
Shop around for the lowest LMI cost
Not all lenders mortgage insurance is created equal. Depending on the insurance provider, the lender, and your deposit size, premiums can vary considerably - anywhere from 0.5% to more than 4.5% of the property’s value is common.
Australia has two major LMI providers: Helia (formerly Genworth) and QBE. Most lenders will partner with just one of these although some will work with the two.
Some lenders may also source their LMI from smaller providers, which are sometimes owned by the lenders themselves. They may even offer LMI internally, although this is usually backed by one of the two major LMI providers.
Which LMI provider is the cheapest?
Unfortunately, this is difficult to answer simply. Premiums differ significantly for different types of loans, different borrowers (first home buyers can be considered riskier), and differing loan-to-value ratios (90% LVR loans will be considered riskier than 85% LVR ones).
In most cases, you won’t get to choose which insurer you go with. That will be up to your lender. If they have an exclusive agreement, they will, of course, go with their provider but may offer you the cheapest premium if they deal with both.
It pays to shop around when you’re looking for a lender and ask what their LMI charge will be. There may be a significant difference between lenders, and this can be a factor you consider in deciding on the best home loan for you.
While you're looking home loans, the table below features some of the lowest interest rates on the market which, of course, is another major consideration in choosing a lender.
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | Max LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare | Promoted Product | Disclosure |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.04% p.a. | 6.06% p.a. | $3,011 | Principal & Interest | Variable | $0 | $530 | 90% | 4.6 Star Customer Ratings |
| Promoted | Disclosure | |||||||||
5.99% p.a. | 5.90% p.a. | $2,995 | Principal & Interest | Variable | $0 | $0 | 80% | Apply in minutes |
| Promoted | Disclosure | |||||||||
6.09% p.a. | 6.11% p.a. | $3,027 | Principal & Interest | Variable | $0 | $250 | 60% |
| Promoted | Disclosure | ||||||||||
5.69% p.a. | 6.16% p.a. | $2,899 | Principal & Interest | Fixed | $0 | $530 | 90% |
| Promoted | Disclosure |
Mortgage brokers may also have some inside knowledge about what LMI premiums may offer the better deal in your circumstances.
Pros of LMI offers and discounts
Get into market sooner
With a smaller deposit you’ll be able to get into the market sooner, and the capital gains you stand to make could quickly outweigh any extra paid on securing your home loan. It also gets your foot in the door and your deposit savings won’t be outpaced by runaway housing prices. However, appreciation in home values isn’t always guaranteed.
Stop treading water earning little savings interest
It can be demoralising being a diligent saver and seeing your money earn barely any interest, particularly at times when interest rates are low. Real savings can even go backwards when inflation is taken into account. It’s almost like the world just wants you to throw caution to the wind and take the leap into home ownership. It is often said the best savings account is piling money into your home loan.
Build up equity and refinance
As you’re getting into the market sooner, you can start paying off your home loan sooner and build up equity in your property. If you’re not impressed with the home loan interest rate you initially signed up for, provided it’s a variable rate, you can usually refinance when you’ve built up at least 20% equity and renegotiate a more competitive rate.
Cons of LMI offers and discounts
Higher interest rate
Some no LMI home loan deals aren’t offering the lowest interest rates. The lowest rates are usually reserved for those who have a 20% or greater deposit. You’ll have to weigh up the amount of extra interest paid versus time spent saving for a deposit and the potential for capital gains.
Compare LMI premiums
As we’ve already discussed, depending on the insurance provider, the lender, and your deposit size, LMI premiums can vary considerably - up to tens of thousands of dollars. A more expensive premium, dictated by your lender, could outweigh any LMI discount that’s being offered in the first place.
May not offer much of a benefit
If you’ve got a 15% deposit and considering a no-LMI home loan, stop and ask yourself if it’s really that much more onerous to save 20% and find a more competitive home loan deal. This is ultimately a personal decision.
As with most things in life, there’s no such thing as a free lunch. While you’ll get a discount on LMI with these offers, you might have to compromise in other areas. As always, shop around and consider your own finances and budget before applying for a home loan.
Photo by Maria Ziegler on Unsplash
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