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See how you can avoid paying this extra fee.

If you’ve recently applied for a home loan and been charged an extra fee in the form of Lenders Mortgage Insurance (LMI), you may be wondering; why you? We’ll unpack LMI, and ways you can avoid paying this extra insurance fee.

What is Lenders Mortgage Insurance?

LMI is an upfront fee charged by banks to borrowers who want to borrow more than 80% of a property’s value. LMI can be used to borrow up to 95% of your property’s value, meaning you may only have to save up for a 5% deposit.

READ MORE: Could you benefit from the First Home Super Saver Scheme?

Why do lenders charge mortgage insurance?

LMI is the way your lender protects themselves in a high-risk loan situation. If a lender thinks you could be in a financial position where you may default on your home loan repayments, they will charge LMI. Low-deposit holders aren’t the only ones who can be hit with LMI, those with bad credit ratings or low documentation may also have to pay LMI with amounts as low as 60% of property value.

LMI is usually paid in a lump sum before the loan is given out, or incorporated into monthly repayments depending on the lender.

What does Lenders Mortgage Insurance cost?

LMI costs vary from bank to bank, so do your homework before signing up with your preferred lender. Generally speaking, LMI is calculated based on your Loan to Value Ratio (LVR). For example, if the amount of your deposit is less than 15% of the loan value, you have an LVR of more than 85%.

The actual cost of LMI usually depends on your LVR and the amount of money you borrow. If you saved up a $40,000 deposit for a home loan worth $400,000, you could be paying up to $10,000 in LMI over the course of the loan.

Be sure to discuss the exact amount of LMI you’d be required to pay with your lender before signing any contracts.

READ MORE: Here's our ultimate first home owner's guide

How can I avoid Lenders Mortgage Insurance?

There are a few key ways you can avoid paying LMI:

  • Save for a 20% deposit: It’s the most obvious option, but spending a little more time saving to make the 20% will save you thousands of dollars in the long run.
  • Take out a guarantor loan: A guarantor home loan involves using someone else’s property as a security blanket for your loan — this is usually a family member and someone that you have a strong relationship with. With a guarantor, banks are willing to lend as much as 110% above the property value with competitive rates, without the requirement of LMI.
  • See if you’re eligible for the First Home Buyer Deposit Scheme: This scheme enables first home owners to pay as little as a 5% deposit, with The National Housing Finance and Investment Corporation (NHFIC) guaranteeing the remaining percentage of the deposit. Lenders won’t require you to make additional LMI repayments, but it’s only open to borrowers who meet certain criteria.
  • If you need help getting your living expenses under control to find a better home loan rate, see what Joust has to offer.