This article originally appeared on Nectar Mortgages and has been published here with permission.
As you apply for a mortgage, you’ll hear about Lenders Mortgage Insurance (LMI). This is a type of insurance that lenders take out to cover themselves in case the borrower (you) isn’t able to make repayments anymore, defaults on the loan and they need to recover any outstanding balance. There are two important points you need to remember about LMI:
The premium fees for LMI are passed on to the borrower.
They are designed to protect the lender, not the borrower.
Normally, you’ll only have to pay LMI if you can’t supply a home loan deposit of at least 20% of the total property value.
A disadvantage of LMI is that it’s an extra expense you will have to make regularly, on top of your mortgage. If you would rather not pay LMI, here are some methods that could help you avoid the extra cost.
Meet the minimum deposit prerequisite
It’s the obvious answer, it’s also the most common way a borrower can avoid paying LMI. As we mentioned earlier, most lenders will ask you for a home loan deposit of at least 20%. The more money you borrow from a lender, the higher the risk is for the lender to recoup that money should you default on your repayments. So, by paying a higher deposit you appear less risky to a lender, which in turn makes it more likely that the lender will work with you without LMI.
Having a low-risk profession
Lenders are more likely to waive LMI if the borrower has an occupation that is deemed low risk.
In this case, a low-risk profession is one which provides an above-average and steady income, making the borrower less likely to default on repayments.
Some low-risk occupations that may be able to borrow up to 100% of their loan include medical professions like doctors, optometrists, dentists and veterinarians.
Other professions may be able to borrow up to 90% of their loan. This includes accountants, professional athletes, lawyers, mining specialists and entertainment professionals.
Apply for a grant or scheme
The government provides several schemes and grants designed to help first-home buyers purchase a home more easily. Those who qualify for these types of grants can sometimes borrow up to 95% of the property value without paying LMI. Grants like the Family Home Guarantee, allow an eligible single parent to buy a home with a deposit as low as 2%.
Please bear in mind that schemes like the First Home Guarantee Scheme and Family Home Guarantee Scheme have limited allocations.
You can find out more about the different grants and schemes available here.
Consider a guarantor loan
Another way you can consider getting out of paying LMI is by asking for help from someone via a guarantor loan. Under a guarantor loan a relative, like your mother or father, could offer their property up as co-security alongside yours. This additional security helps lower the risk in the eyes of the lender. However, this type of loan carries an obvious risk to the guarantor i.e. the person helping you. If you default on the loan, the responsibility will fall back on the guarantor.
Before you go for this type of loan, make sure you discuss the matter thoroughly with your guarantor and seek legal advice. Also, bear in mind that the guarantor will need to fulfil certain requirements like meeting income thresholds, having enough equity in their own property and having a good credit score.
Contact a Whiteroom Finance Mortgage Broker to discuss if a guarantor loan is right for you.
Take a shared equity agreement
A shared equity agreement lets another property owner fund part of a home that you want to buy. They become your ‘equity partner’. You can then apply for a regular home loan based on the remaining price of the property. You will still have to pay your equity partner back. But depending on the agreement made, this may be at a significantly lower interest rate.
Consider buying a cheaper property
If all else fails, then you may want to consider buying a more affordable property. One in which you can pay the necessary deposit and avoid LMI altogether. It may not be ideal, but at least you’ll be able to purchase a home you can call your own sooner.
Speak with a Mortgage Broker
When in doubt, talk to the experts. A Mortgage Broker could help you find ways to avoid LMI on the property you want to purchase. They could also help you find alternative solutions based on your unique situation. Get in touch and don’t be afraid to ask any and every mortgage-related question you can think of.
Whiteroom Finance is here to help you!