How to avoid LMI

Options to avoid paying LMI

If you try to buy a typical $600k first home with a 5% deposit, you’ll likely be hit with a Lenders Mortgage Insurance (LMI) premium of over $20,000!

By the way, you don’t get any protection after paying for this insurance – you’ve simply paid the bank’s insurance for them.

Thankfully, there’s plenty ways to avoid paying LMI:

  1. Save a 20% deposit
  2. Get LMI waived with a 15% deposit
  3. Use the First Home Guarantee to buy with a 5% deposit
  4. Get a personal loan for your house deposit (e.g., OwnHome)
  5. Hire a financial coach to help you save a house deposit faster
  6. Be in the “right” job and get LMI waived
  7. Get a guarantor to help you buy with little-to-no deposit

There are strings attached to every option, so take a look through the the pros and cons of each option below.


Understand the (hidden) costs of each option

There’s no such thing as a free lunch and each of these options for avoiding LMI comes with their own costs or risks… and they’re often hidden.

To help you understand the real costs of each option, let’s use some typical numbers. Let’s imagine a first home buyer that is:

  • looking at a $600k property;
  • able to save $15k per year towards her house deposit; and
  • reckons house prices are going to rise 3% each year, so she wants to buy as soon as she can

Option 1: Save a 20% deposit

The most straight forward way to avoid paying LMI is by saving up a 20% deposit. This demonstrates to the bank that you’re a lower risk customer that they can trust with their money. A 20% deposit on a $600k is $120k, so it’d take around 8 years to save up the full deposit at $15k per year. This is the longest path to homeownership amongst all the options. We’ll use this as the base case for comparing the rest of the options to avoid LMI below.

Option 2: Get LMI waived, or reduced, with a 15% deposit

There are several lenders that offer to waive, or reduce, LMI If you can save up a 15% deposit. Options include:

Pros

Buy 2 years sooner to avoid potential ~$30k increase in house prices (i.e. $600k house growing 3% p.a. for two years).

Cons

Lenders may charge a higher interest rate (typically 0.3% higher), so our first home owner may end up paying an extra $3K in interest in the two years it takes them to build up enough equity to refinance to a better interest rate.

Net benefit

$30k better off compared to saving up a 20% deposit.

Option 3: Use the First Home Guarantee to buy with a 5% deposit

The Federal Government’s First Home Guarantee scheme enables you to buy with a 5% deposit.

Pros

Buy 6 years sooner to avoid potential ~$100k increase in house prices.

Cons

  • Lenders may charge a much higher interest rate (typically 1.0% higher) as you’re considered riskier, so our first home owner may end up paying almost $30k in extra interest in the five years it takes them to build up enough equity to refinance to a better deal.
  • All it takes for all your hard-earned equity to vanish is your house value going from $600k to $570k. If you fall into negative equity, you may be unable to refinance to a better deal until you rebuild that equity, so you could get trapped paying higher interest (+$5k every year) for an extended period.
  • The scheme has price caps, which has meant there’s more people competing for the affordable homes in that price range in order to qualify for the scheme. This competition puts upward pressure on these house prices, so buyers are probably paying an inflated price for a pretty average house. This is a real cost. If a couple extra people turn up to the auction thanks to the scheme, bidding gets a bit more heated, then one of them offers an extra 10% because the house is within the price cap and the scheme is their only way to get into the market, then they really are paying $50k for the privilege.

Net benefit

$20k better off compared to saving up a 20% deposit.

Option 4: Get a personal loan for your house deposit (e.g., OwnHome)

There are now companies, like OwnHome, that are offering to lend people money for their house deposit to enable them to buy a home years sooner.

Pros

  • Buy 6 years sooner to avoid ~$100k in house price rise.
  • Free inclusions from OwnHome, such as a buyer's agent and building & pest inspections.
  • Support/handholding during the home buying process, which can be valuable for first home buyers who are feeling a bit overwhelmed by it all.

Cons

  • Large initial fee of 2.2% of property price.
  • Higher interest rate on the deposit loan from OwnHome (roughly 8% p.a. more than standard home loan rate as at May 2024).
  • Potentially higher home loan interest rate because you only have access to a limited range of lenders with OwnHome, so there may be less competition.
  • Reduced borrowing power as the deposit loan repayments reduce cash flow available for your primary home loan (like any other loan).
  • Risk of negative equity if property prices fall because you have zero equity at the start.

Net benefit

Net benefits depend heavily on property price growth (i.e., high growth = big benefits, but no growth = negative benefits). In this specific scenario where the home buyer expects property prices to grow at 3% p.a. (nobody has a crystal ball though!), the benefits of buying sooner may just outweigh the initial fee and interest paid on the deposit loan.

Option 5: Get financial coach to help you save faster and buy sooner

A financial coach can help save up a house deposit faster, buy sooner and smash your mortgage in half the normal time. They help you get clear on where your money is going, align your day-to-day spending with your priorities and put your savings on auto-pilot.

Pros

  • Buy 5 years sooner to avoid ~$90k in house price rises.
  • Avoid over $300k in interest by repaying your mortgage in half the normal time (by simply continuing the savings habit you established while saving up your house deposit).

Cons

Financial coaches typically charge $300-600 for their coaching program.

Net benefit

$400k better off compared to saving up a 20% deposit slowly by yourself and simply making the minimum repayments on your mortgage afterwards.

Option 6: Be in the “right” job and ask to get LMI waived

This is one of those situations where it pays to be in the “right” job as this deal isn’t available to everyone. While it’s not always advertised, lenders offer “professional loans” to people that work in fields that the lender perceives as lower risk. A key perk of the offer is that they can avoid having to pay LMI with a less than 20% deposit.

The exact list of professions differs by lender, but professions that commonly make the cut are:

  • Medical professionals (e.g., doctors, dentists, pharmacists, vets, etc.)
  • Legal professionals (e.g., lawyers, solicitors, barristers, etc.)
  • Finance professionals (e.g., accountants)

Pros

Buy 6 years sooner with a 5% deposit to avoid ~$100k in house price rises (i.e. $600k house growing 3% for six years).

Cons

Limited eligibility, so you probably can’t take advantage of it!

Net benefit

$100k better off compared to saving up a 20% deposit.

Option 7: Get a guarantor to help you buy with little to no deposit

Like the previous option, this option is only available for the lucky few and it’s got some whopping strings attached. If someone is willing to guarantee repayment of your mortgage (a huge ask), then you can buy a house with little to no deposit.

Pros

Buy 7 years sooner to avoid ~$120k in house price rises (i.e., $600k house growing at 3% for seven years).

Cons

It’s a massive risk for your guarantor – they’re putting their home on the line for you! It’s typically parents at/nearing retirement being asked to go guarantor and they have limited ability to recover from a loss like this if it happens as their high earning years are typically behind them, so please seriously consider what you’d be asking them to do.

Net benefit

+$100k better off compared to saving up a 20% deposit (but with a whole lot of risk for the guarantor).

Remember - different assumptions, different outcomes

Remember, all the costs and benefits mentioned in this article are based on the assumptions outlined earlier. If you’re looking at a different price range, saving faster/slower, or believe house prices will grow/fall at a different rate, then your calculations and outcomes will be different.

This is NOT financial advice – it is simply factual information and a prompt to consider the full range of costs and benefits when making your own decision.