There are many ways to avoid paying Lenders Mortgage Insurance (LMI). Depending on your lender’s requirements, LMI allows you to borrow up to 95% of the purchase price of your home, with a lower deposit than is usually required. The catch is, it can be very expensive and only benefits the lender should you default on the loan. Traditionally, lenders require borrowers to have at least a 20% deposit to avoid LMI completely.
With property prices across most Australian cities continuing to rise, many first home buyers are having difficulty saving enough for a 20% deposit plus costs.
Strategy 1
Save more money. This will take time and could price you further out of the market if home values continue to rise. A $400,000 home will mean savings of $100,000 to cover a 20% deposit and costs.
Strategy 2
Buy off the plan. Based on current legislation, a first home buyer will receive a $10,000 grant and will not pay any stamp duty. It will also give you more time to save enough to meet a 20% deposit. Buying this way could mean a $30,000 head start and therefore less chance of having to pay LMI. Be sure to obtain independent property and legal advice before committing to an off the plan purchase as they can be confusing.
Strategy 3
Borrow money from your parents. If you have been able to save enough for a 10% deposit, ask your parents to help cover the shortfall of 10%. The selling point is, on a $400,000 purchase this will save you roughly $7,000 in LMI costs.
Strategy 4
Use a Family Guarantee loan. This option is often favoured over Strategy Three. Instead of borrowing 10% from your parents, the lender would take 10% equity in your parent’s property as a limited guarantee. Effectively, your borrowing ratio is 20% and therefore avoid paying LMI.
Using our $400,000 example, $40,000(10%) would be the limited guarantee placed on your parent’s property. If you default on your loan and the property is sold for $40,000 less than the loan balance this is the maximum amount your parents would be liable for. The benefits are that the parents do not have to come up with cash and the full loan is in the child’s name. As soon as there is $40,000 equity in the property by means of capital growth and loan reduction, the loan can be refinanced and the guarantee removed.