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21
Apr 17

How to Avoid Paying LMI

by Matthew Ikin
How to avoid paying LMI

Lenders Mortgage Insurance, or LMI is a one-off insurance premium which, in some cases can be payable to protect your lender in the unlikely event that you were unable to meet your mortgage repayments. This is applicable in instances where you borrow more than 80% of the value of the property: i.e borrowing $450,000 to purchase a $500,000 house.

When purchasing a property, small costs along the way can build up to five figures in no time. In theory, there are only 3 ways to completely avoid LMI:

1.    Save 20% or more as a deposit;

2.    Have someone go guarantor for your loan.; or

3.    You fall into a specialist lending category for occupation type. For example, if you are a medical professional, chartered accountant or an engineer. These policies vary from lender to lender.

While these are ways to avoid paying LMI altogether, there are also some ways you can reduce the amount you pay.

LMI increases as the amount you borrow increases, due to the lender needing to cover themselves for the higher risk. Put simply: if you borrow less you pay less LMI. This could either be done by negotiating down the price of the property, or by purchasing a cheaper property altogether.

In some cases, LMI is waived with select lenders at up to 85% Loan to Value Ratio (LVR). In these instances, the lenders will pay the LMI themselves and wear the cost, in order to get your business. This exception can be made if you meet and agree to the lender's strict guidelines for risk reduction.

LMI is calculated on a sliding scale, eg: For a $500,000 property, borrowing 89.9% of the loan will incur less of an LMI payment than borrowing 90%.

  • Borrowing $450,000 (90% LVR) incurs a 2.75% LMI payment. LMI = $12,375
  • Borrowing $449,500 (89.9% LVR) incurs a 1.91% LMI payment. LMI = $8,585

This means borrowing $450 less, you lower the LMI rate premium from 2.75% to 1.91%, saving you $3,790.

For more information on how you can minimise your LMI costs, get in touch with one of our friendly loan writers at Pioneer Credit Connect on 1300 015 133 or click the link below.

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