The most common way people avoid paying the LMI is to meet the 20% deposit requirement set by lenders. This means that you only borrow 80% of the value of the property, which can be expressed by the loan-to-value ratio (LVR). One method to avoid paying the LMI is to save the minimum deposit for the purchase of the property. Alternatively, if your deposit is less than 20% but you have a guarantor of the real estate loan, you may be able to avoid paying the LMI.
Your guarantor can help by providing additional security that reduces the LVR to 80% and thus allows you to avoid paying the LMI. As you can see from the above, LMI can come at a high price, so it would be worth looking for some strategies to avoid the cost, if possible. If the amount of the LMI is capitalized on your loan, your lender will generally charge you interest on it, along with the rest of the loan. For these reasons, an exact LMI cost cannot be given until a property and lender have been selected, and it could be a fixed rate of up to thousands of dollars.
However, since different lenders may have different rules, it might be worth checking what each individual lender's policy is. When you apply for a mortgage loan, the deposit you provide as a percentage of the value of the property will determine whether or not you should pay mortgage insurance (LMI) from lenders. Lenders who waive the LMI in favor of their own risk commission (also called reduced capital commission, REF or low deposit premium, LDP) are able to maintain the lending process in-house through their own policies. Some institutions also offer savings accounts designed specifically for those who save for a mortgage deposit.
Lenders generally have contracts with one or both of these providers and may have negotiated a specific set of agreements with them for their customers. Your lender may be able to recover the deficit from the LMI provider, but even if it does, it doesn't mean you're free of problems. The actual cost of the LMI will depend on a number of factors that, together, affect your lender's risk assessment of you as a borrower. This occurs when the value of your home is lower than your loan and can make it difficult to sell your home in the future or refinance if you want to switch to another lender.
However, it's important to remember that the LMI doesn't provide you with any protection even if you pay it, but it's there to protect your lender. Online lender Homestar recently launched a “no LMI” mortgage loan that eliminates the cost for eligible customers.
