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:
There are strings attached to every option, so take a look through the the pros and cons of each option below.
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:
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.
There are several lenders that offer to waive, or reduce, LMI If you can save up a 15% deposit. Options include:
Buy 2 years sooner to avoid potential ~$30k increase in house prices (i.e. $600k house growing 3% p.a. for two years).
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.
$30k better off compared to saving up a 20% deposit.
The Federal Government’s First Home Guarantee scheme enables you to buy with a 5% deposit.
Buy 6 years sooner to avoid potential ~$100k increase in house prices.
$20k better off compared to saving up a 20% deposit.
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.
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.
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.
Financial coaches typically charge $300-600 for their coaching program.
$400k better off compared to saving up a 20% deposit slowly by yourself and simply making the minimum repayments on your mortgage afterwards.
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:
Buy 6 years sooner with a 5% deposit to avoid ~$100k in house price rises (i.e. $600k house growing 3% for six years).
Limited eligibility, so you probably can’t take advantage of it!
$100k better off compared to saving up a 20% 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.
Buy 7 years sooner to avoid ~$120k in house price rises (i.e., $600k house growing at 3% for seven years).
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.
+$100k better off compared to saving up a 20% deposit (but with a whole lot of risk for the guarantor).
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.