When you lack the necessary deposit for a new home, the lender will likely require you to pay lenders mortgage insurance. As you may expect, this insurance protects the lender in case you default on your loan.
Buying a new property is probably the most significant expense you will ever have. Besides the cost of the home, there are many additional fees to pay before you get the keys. Lenders mortgage insurance (LMI) may be one of these fees.
Understand How LMI Works
Before offering tips for avoiding LMI, it is essential to understand how this insurance works and who it protects. Nearly a quarter of Australians believe that LMI is a form of insurance that protects the borrower, like homeowner’s insurance. There is a glossary here to understand the terminology of LMI.
As the name suggests, lenders mortgage insurance protects the lender. It is protection in case you cannot afford your repayments. When this occurs, the lender receives compensation from the insurance company.
You are essentially paying the insurance premiums so that the lender can receive a payout from the insurance company if you default on the home loan.
Save Up More Money for a Larger Deposit
Typically, the only way that you are going to eliminate the need for LMI is to provide a larger deposit. Lenders often require LMI if the deposit is less than 20% of the home value.
For example, you have a $25,000 deposit for a $250,000 home. You will need a home loan of $225,000. As the deposit is only 10% of the home value, the lender will require LMI. Depending on several factors, you may need to pay between $3,097 and $4,235 for LMI in this situation. Lendi provide a free LMI calculator for you to work out your needs.
Waiting several months while you save more for the deposit can help reduce or eliminate the LMI fees.
Ask Your Parents for Financial Assistance
Millennials in Australia are having a tough time affording new homes. A lot of these younger people are turning to their parents for assistance. Receiving a cash gift from your parents may provide you with enough of a deposit to eliminate or limit the LMI.
Keep in mind that some lenders do not allow a cash gift to be included in the deposit. However, there are also lenders that will allow the cash gift to contribute to the deposit when determining LMI.
Ask Your Parents to Act as Guarantors
The final solution for trying to avoid LMI payments is to ask your parents to act as guarantors. A guarantor provides the lender with additional assurance that you will complete your repayments. It eliminates some of the risks for the lender while placing additional risk on your parents.
Estimate Your Lenders Mortgage Insurance Payments
As you can see, these solutions do not provide a workaround for avoiding LMI. If you do not have enough of a deposit, you will still likely need to pay lenders mortgage insurance.
You should also understand that your LMI payments may not be as high as you expect. Before ruling out the idea of buying a home due to the need to pay lenders mortgage insurance, you should use an LMI calculator to estimate your payments.