Buying your first home is one of the most important acts in a person’s life. Taking your first home buyer’s loan is one of the biggest financial transactions of a lifetime. It also has effects reaching far into the future – 10, 20, 30, or more years! Therefore first-time homebuyers need to be extra careful about what they commit to. What is the value of the property? What are its perspectives for appreciation? What is the interest rate? What are the terms of the first home buyer’s loan?
What Is LMI?
An important part of the loan terms is the lenders mortgage insurance, abbreviated as LMI. LMI is a one-off paid premium paid at the beginning of the home loan. This is peculiar insurance, as it is paid by the borrower and it protects the lender in the event of default on the loan. It is also the lender who will arrange its closure – hence the name – Lenders’.
First-time home buyers will calculate the LMI in the same way as all other property investors. However, it is possible that first-time homebuyers will be required to have an LMI more often than, say established middle-aged professionals. Read on.
LMI = 0 ?
Not all home loans will necessitate an LMI. Hence in some cases, the LMI will be zero.
Normally in Australia home borrowers from banks and other financial institutions, are required to ensure 20% of the property price as a deposit. Meaning that the bank will provide the remaining 80%. This standard scenario means that the ratio of loan to value (LTV) is 80% – the LTV rule.
Further to the deposit, the creditworthiness of the borrower will be examined. The bank will require proof of income with which the loan will be repaid.
Should the 20% deposit be made, and adequate proof of income be supplied, no LMI will be required. Hence no calculation of the LMI will be needed. It will be zero.
LTV > 80%
With home loans, the property is the main collateral for the bank, which ensures the proper repayment of the loan. The borrower’s 20% deposit acts as a buffer in the event of property depreciation. Or it may be needed to increase liquidity (sell the property faster), should the borrower default and the bank have to remarket it. Hence if the deposit is less than 20% (LTV = 85% or more) the collateral for the lender is decreasing. This will mean that the risk for the lender has grown. Respectively an LMI will most likely be required.
First-time home buyers will usually be young adults who have not had enough time to amass the 20% deposit. Hence this consideration is highly applicable to them.
Weak Creditworthiness
Another scenario that will require the LMI to kick in is lack or poor proof of income (even if the LTV = 80%). This is not as uncommon as it may sound. Not all individuals will hold a steady nine-to-five job. Many self-employed borrowers or owners of small businesses will have a hard time proving to the lender that they have a stable income (usually they do not). This too will be considered an increased risk by the bank and will lead to a requirement of LMI.
With all due respect, first-time homebuyers may not have a long professional CV. In fact, the contrary is often the case. Hence their creditworthiness will suffer, even if they have just got a regular job. So this is an important consideration for them.
Higher Property Price
Usually, property prices will match the appraisal of the housing.
Value = Appraisal
However, if the borrower, for some reason, is willing to pay a higher price for the property (say she wants to be in the same neighborhood as her parents), then the appraisal suggests the LTV rule will be disturbed, as the value (appraisal) is lower than the price. This again will make the bank request an LMI.
Is LMI Bad?
People tend to consider any additional expense as a negative occurrence. However, even if it costs money, the LMI can actually lead to profits. Say you are a young investor, who has not yet collected the needed 20% deposit but sees the potential of the properties in Brisbane in view of the 2032 Olympics. Some suburbs are expected to see housing appreciation as high as 400! The LMI will provide the solution of buying the home today (even with an insignificant deposit), rather than in 5 years when the 20% deposit will be all saved up, but the prices may have already doubled.
Furthermore, LMI may be capitalised. This means that it needs not to be paid immediately upfront, but may be added to the principal amount of the loan and repaid gradually over time. Sure it will carry some interest costs, but the monthly payments will be insignificant when stretched over the life of the credit.
How Is LMI Calculated?
We already know when the LMI will be zero. When this is not the case, the requested LMI will be a function of the risk, which the lender endures.
LMI is determined as a percentage of the credit amount.
The LVT will have a direct impact on the LMI percentage. The higher the LTV, the higher the risk for the lender, hence the higher the LMI percent.
Poor creditworthiness will have the same effect. Creditworthiness is not a good and bad verdict. There is a big grey area in between. Hence very bad creditworthiness will trigger a higher LMI percentage and mildly poor creditworthiness will provide the lowest of LMI premiums.
The LMI value and percentage will vary not only based on the risk of the loan. It will differ from lender to lender. Some large banks will have an in-house LMI product, while others will use an external insurance company. The biggest providers of LMI coverage in Australia are Genworth and QBE. Both banks and insurance companies will provide alenders’ mortgage insurance calculator on their site. As LMI rates tend to vary, it is highly advisable that new home buyers either do extensive research on the matter or use mortgage brokers or home loan brokers to facilitate such information.
Here are some LMI current (Q4 2021) average estimations from Finder.com using theirLMI calculator:
| Property value | Deposit ($) | Deposit (%) | Estimated LMI cost* |
| $400,000 | $20,000 $40,000 $60,000 | 5% 10% 15% | $12,711 $6,742 $3,294 |
| $600,000 | $30,000 $60,000 $90,000 | 5% 10% 15% | $22,788 $11,772 $5,941 |
| $800,000 | $40,000 $80,000 $120,000 | 5% 10% 15% | $34,982 $17,042 $9,064 |
How To Waive LMI?
Even if LMI is required by the lender there may be some ways in which the borrower may waive entirely or at least minimise the LMI cost. Here are some ideas:
● Wait For A Promotion
It is not uncommon for lenders to decide to accept a higher dose of risk than they commonly do. This may be presented as a promotion of accepting an LTV of 85% without the need for LMI. Or it may be granted credit approval of LTV of 90% with no LMI to certain professions – say, doctors.
● Increase The Deposit
As already mentioned the LTV ratio is key for determining the LMI. So, increasing your deposit to the LTV standard of 80% (or thereabout) may waive the need for LMI.
● Support From The Parents
As first-time homebuyers are usually young people, some support from the parents may not be out of the question. They can help the LTV reach standard levels and waive the need for LMI.
