What is LMI and how does HomeStart help to avoid it?
15 July 2019
LMI stands for Lenders Mortgage Insurance. Put simply, it is a fee charged by lenders (banks and home finance providers) to borrowers as a means of protection in case the borrower cannot make the repayments on their loan.
There is a common misconception that LMI is a fee that will cover the borrower in case they default on payments. This is not true. Instead, the fee is charged by the lender to assist with covering any losses should the homebuyer miss repayments.
Many prospective homebuyers in Australia need to borrow more than 80% of the value of the property they intend to purchase, meaning they need to pay the LMI as a means of security for the lender. Most people find it difficult to save more than 20% of the property price (about $80,000 for a $400,000 property) and are therefore required to pay the fee. That fee is generally added to the home loan.
The cost of LMI can range from $5000 to $15,000 depending on the size of the deposit and how much the buyer needs to borrow. But have no fear. There are ways to avoid paying LMI.
The first is relatively obvious: save more than 20% of the property value, as well as any additional costs associated with the purchase (such as stamp duty and taxes).
Secondly, find someone who is willing to be a guarantor on the loan. Simply, this means the guarantor will assume the risk if you default on your loan – that is, they will have to pay the outstanding amount.
And thirdly, find a lender who doesn’t charge LMI. HomeStart Finance is one such lender, instead allowing homebuyers to borrow up to 97%* of the value of their chosen property while charging a Loan Provision Charge (LPC) instead. For example, a $300,000 loan would incur a LPC of just $1,195 – about $6,000 less than an LMI**.
*Based on a Graduate and Low Deposit Loan
**On a loan amount of $285,000 for a property value of $300,000, HomeStart’s LPC will cost approximately $1,195 compared to LMI of $7,934 and $7,542 by two major banks. Stamp duty, fees and charges apply.