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Home Loans, Lenders Mortgage Insurance

What is Lenders’ Mortgage Insurance?

Lenders’ mortgage insurance (LMI) is insurance that protects lenders if borrowers default on their loan repayments. It helps to reduce lenders’ risk. 

Will I need to take out lenders mortgage insurance on my home loan?

Most lenders in Australia will require you to take out LMI if you’re applying for a home loan and you have a deposit of less than 20% of the value of your home. In other words, if you need to borrow more than 80% of the value of the home that you want to buy (the technical term for this is the ‘loan-to-value ratio’, or ‘LVR’ for short).

Example:

According to the Real Estate Institute of Victoria, the average price of a home in Melbourne is currently $860,000. A 20% deposit on an $860,000 home is $172,000. If you can’t raise that amount, it’s likely that you’ll be charged the cost of LMI by your lender.

How much does lenders’ mortgage insurance cost?

The cost of LMI varies depending on:

  • The lender and their insurance provider,
  • The amount of deposit you can provide,
  • The amount you borrow,
  • And the loan term.

However, as an example, the cost of LMI for a loan of
$750,000 would likely be well over $10,000.

How do I pay for lenders’ mortgage insurance?

You can choose to pay the cost of LMI in one of two ways:

1) as a one-off fee when you receive your loan funds to buy your home, or

2) you can have it added onto the total loan amount and progressively pay it off as part of your regular loan repayments.

Option 1 is the cheaper option. However, if you don’t have enough deposit to be able to avoid the cost of LMI, it’s probably unlikely that you’ll be able to afford to pay the total LMI cost upfront.

If you choose option 2, it’s important to understand that your monthly loan repayments will increase to cover the LMI cost. You’ll also be charged interest on the cost of the LMI.

How can I avoid the cost of lenders’ mortgage insurance?

There are two ways to avoid the cost of lenders’ mortgage
insurance:

1) wait until you (and/or your partner) can save a 20% deposit yourself, or

2) if you’re eligible for the federal government’s First Home Loan Deposit Scheme.

We’ll now take a look at both of these ways to avoid LMI in some more detail.

1) Saving a 20% deposit

This may be time-consuming, even if you’re eligible for the First Home Owner Grant (FHOG). The FHOG is $10,000 for eligible first home buyers in Melbourne and $20,000 for those in regional Victoria. It’s important to understand that the higher FHOG amount in regional Victoria is only available until 30 June 2020.

To be eligible for the FHOG, you and/or your partner must be:

  • First home buyers,
  • buying a residential home (not an investment property) that’s valued at $750,000 or less and that is less than 5 years old,
  • over 18, and
  • intending to live in the property for at least 12 months after you buy it.

In addition, at least one of you must be either an Australian citizen or a permanent resident.

You can apply for the FHOG in Victoria online via the State
Revenue Office.

2) The First Home Loan Deposit Scheme

The First Home Loan Deposit Scheme was introduced by the federal government on 1 January 2020 to help first home buyers to avoid the cost of LMI. The Scheme provides eligible applicants with a government guaranteed loan for the difference between the deposit that they can provide themselves and the 20% deposit required by lenders to avoid the need for LMI.

To be eligible for the First Home Loan Deposit Scheme, you
and/or your partner must:

  • be first home buyers
  • be able to save at least a 5% deposit yourselves (which can include the FHOG is you’re eligible),
  • be one of the first 10,000 eligible applicants to apply each year,
  • have a taxable income less than $125,000 per year if you’re single, or less than $200,000 per year if you’re a couple,
  • be aged over 18,
  • be buying a residential home to live in yourselves (not an investment property),
  • be Australian citizens, and
  • be buying a property that is below a threshold value. That value is currently $600,000 in Melbourne and Geelong, and $375,000 in other parts of Victoria. 

The First Home Loan Deposit Scheme is administered by the National Housing Finance and Investment Corporation (NHFIC). However, you don’t apply for the Scheme directly through the NHFIC. Instead, you apply through one of their more than 30 participating lenders.

How Our Melton Mortgage Brokers Can Help You

At PAT Finance & Mortgage Broking, we can help you to find the right home loan. We’re based in Melton in Melbourne and service nearby areas including Bacchus Marsh, Caroline Springs, Plumpton, Rockbank, Gisborne and Sunbury. We’ll take the time to understand your individual home loan needs and goals. We work for our clients, not for lenders and we’ll provide you with the best possible mortgage broking advice in Melton.

Contact us today to book your free home loan assessment to find out how we can help you.

Finance your dreams, secure your future. Contact us today to book your free home loan assessment to find out how we can help you.

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