Lenders Mortgage Insurance (LMI) is a specialised form of insurance taken out by lenders when they approve loans riskier than they’d normally prefer. The once-off cost is passed on to borrowers and the amount varies but for high risk loans it can be even more than stamp duty!
For anyone buying a typical home they can avoid paying for LMI by having enough money for 20 percent of the property value plus ALL purchase costs including stamp duty, any loan establishment fees and conveyancing charges. As a guide, these purchase costs will be up to 5% of purchase price. However, in Victoria, where an eligible First Home Buyer has stamp duty waived it can be assumed these costs are around $3,000-$4,000 – this includes two government charges that are still applicable even when duty is waived.
For example, someone who is not a First Home Buyer should have about $125,000 for a purchase price of $500,000 in order to avoid LMI. A First Home Buyer only needs a contribution of $100,000 plus $3,000-$4,000.
Avoiding the cost of LMI may still be possible if you don’t have enough deposit, when you have a property-owning relative willing to help. The relative gives a guarantee and is essentially taking on the risk that would be taken on by an insurer. This is becoming quite common and should be discussed with us if you’d like further information.