First Home Buyers' Guide To Lender’s Mortgage Insurance
Buying a first home can be a steep learning curve— there are many types of home loans to choose from, various fees that need to be paid, and insurance that must be in place before settlement (that’s when you get the keys!).
At Broken Hill Bank, we’re here to help you understand everything you need to know and guide you through the financial aspects of buying a first home.
One type of insurance that banks may require is Lender's Mortgage Insurance (LMI). LMI provides security for the bank in case a borrower defaults. Let’s explore this insurance to learn when it applies to a mortgage and how to minimise or avoid this expense altogether.
Overview
What is Lenders Mortgage Insurance (LMI)
Lenders Mortgage Insurance (LMI) insures the lender (the bank) if the borrower defaults on the mortgage. The bank arranges LMI and passes the cost of the insurance premium on to the borrower.
Lenders Mortgage Insurance is a once-off premium payment that covers the bank for the lifetime of a mortgage. The insurance provides security for the lender and allows the bank to lend to home buyers who do not yet have the total required deposit towards the property.
Can paying LMI help first-home buyers?
LMI can help first-home buyers with a small deposit enter the property market and start to build equity. With LMI, the bank takes on an acceptable level of risk when lending the property purchase price to a borrower without the total required deposit.
Do First Home Buyers Have To Pay Mortgage Insurance?
A first-home buyer with a 20% deposit will not need to pay for LMI. First-home buyers may only need to pay Lenders Mortgage Insurance(LMI) if the deposit towards the new home is less than 20% of the total property purchase price.
How to Avoid or Reduce Lenders Mortgage Insurance
Save for a Deposit
Planning your home purchase and saving as much money for a deposit well ahead of time is the first step. Find out the average price of homes in the area you want to purchase, and set up a savings plan to reach the target amount. Saving as much money as you can for a deposit can help you reduce or avoid LMI altogether.
Based on data for 2024, the average price of homes in and around Broken Hill is $196,000. Anyone buying in a major city or a larger town in Australia may be looking at a higher home price. Knowledge is power, so do your research to find out which areas you can afford to buy in and understand the trade-off between location and price.
Use A Guarantor For The Home Loan
A guarantor is a third party, often a parent or grandparent, who provides an asset as collateral for the borrower's loan. The guarantor effectively provides some deposit as equity from their property.
If the borrower defaults on the mortgage, the guarantor is responsible to cover the borrower's debt. A guarantor without adequate cash savings may need to sell their home or investment property to cover the debt in case of a mortgage default.
As the guarantor supplies the required deposit as security for the loan to the bank, the first home buyer receiving the guarantee will not need to pay LMI.
Use Government Grants
Government grants are available to help contribute towards your deposit. There are many different grants available such as the First Home Owners Grant. Depending on where you live, this grant provides first homeowners up to $15,000. By using these grants with your deposit, you may be able to reduce your LMI premium.
In New South Wales (2024), there are several different types of grants available, such as
First Home Super Saver (FHSS) Scheme
Home Guarantee Scheme
Shared Equity Home Buyer Helper
First Home Buyer Assistance Scheme (FHBAS)
How to Reduce the Lender's Mortgage Insurance Premium
The cost of the LMI premium depends on how much you borrow and how much of a deposit you contribute towards the property purchase price. The larger the deposit, the less you have to borrow, and the less LMI you will pay.
For example, if you have a deposit of only 3% of the property purchase price, the LMI will be higher. If you have a deposit of 15% of the property purchase price, the LMI will be lower.
Learn more: how Lenders Mortgage Insurance works
There may be no out-of-pocket cost for LMI
Lenders Mortgage Insurance can cost thousands, depending on your Loan-To-Value ratio and the size of your deposit. Check with your bank or broker to find out if this sum can be included in the total loan amount, allowing you to use your savings towards the home loan deposit.
Pros and Cons of Lenders' Mortgage Insurance
The Pros of Lenders' Mortgage Insurance
Getting you into your home sooner
LMI enables first-home buyers to save a much smaller deposit before purchasing their first property. You will still need to demonstrate stable employment and that your income is sufficient to meet the regular mortgage repayments.
After owning the property for some time, its value may increase, providing equity. The next time you refinance, if your Loan-To-Value ratio is less than 80%, you will not need to pay LMI.
The Cons of Lender’s Mortgage Insurance
It’s another fee, in addition to stamp duty and the loan fees
The biggest con for LMI is the cost to borrowers. If LMI is included in the home loan, the borrower will pay interest on this amount. If possible, plan to make additional repayments to reduce the impact of cumulative interest on the total loan amount.
Key Tips For First-Home Buyers
The first tip for younger first-home buyers who have the opportunity to live rent-free is to save as much as possible. The more you can save and put towards a deposit for your house, the lower your Lenders Mortgage Insurance will be.
If you have someone willing to be a guarantor for your first home buyer to avoid LMI, create a plan to refinance your mortgage to release the guarantor once your LTV ratio is 80% or below.
Broken Hill Bank’s expert home loan team can guide you through the first home-buying process
At Broken Hill Bank, we can help first-home buyers secure their first home or buy an investment property. Our expert staff will tailor products that can fit your financial situation, whether you have a 20% deposit or want to own your home with a smaller deposit. If you would like more information on buying your first home, Lender's Mortgage Insurance or how to calculate your loan-to-value (LTV) ratio, contact us or call today
FAQ
Do First Home Buyers Pay Mortgage Insurance?
A first-home buyer may need to pay Lenders Mortgage Insurance if their Loan-to-Value ratio is less than 80%. If the first home deposit is between 3% and 19%, then LMI will apply to the mortgage.
Do You Have To Pay Lender’s Mortgage Insurance Upfront?
Lenders Mortgage Insurance is a one-off payment that may be added to the home loan (not an out-of-pocket cost. However, the borrower will then pay interest on the LMI in addition to the property price. To avoid paying interest on LMI, this fee must be paid upfront. The lender will take the borrower’s personal circumstances into account when determining whether to include LMI in the mortgage or as a separate fee.
How Do I Avoid Paying LMI In Australia?
There are three ways to avoid LMI on a mortgage:
Equity in the property must be greater than 20%
The borrower must provide a deposit of 20% or more of the property value
A guarantor may provide security of 20% in cash or equity.
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The content in this blog is intended for general informational purposes only and does not take into account your specific financial goals, circumstances, or needs. While we strive to provide accurate and relevant information, it should not be construed as financial, investment, or professional advice.
Before making any financial decisions or taking action based on the information provided, we encourage you to evaluate its relevance to your individual situation. Broken Hill Bank recommends consulting with a financial professional for advice, you can contact us directly to discuss your unique situation and receive tailored guidance.
