LMI is ‘dead money’, so some home buyers are finding ways to avoid paying mortgage insurance
With soaring property prices pushing more Australians into lenders mortgage insurance, some first home buyers are finding ways to avoid paying for the costly financial product.
Exclusive data given to ABC News shows there has been a rise in lenders mortgage insurance (LMI) policies being taken out as the housing market booms.
LMI is a lump sum payment of insurance that lenders often expect borrowers without a 20 per cent deposit to pay on top of their loan.
It can cost borrowers tens of thousands of dollars, which is often added to their mortgage, meaning the overall cost blows out even further with interest.
Melbourne woman Kelly Lehmann started saving for her first home two years ago.
She figured out that she could afford a property of around $400,000 – but saving the 20 per cent deposit of $80,000 soon proved difficult.
“That was not really attainable, being a solo applicant on a single income renting alone,” she said.
She was given a quote of around $8,000 to $12,000 for LMI to get into the market without the 20 per cent deposit, but she was reluctant to fork out her hard earned money on this financial product.
“LMI adds extra money. Extra money that I didn’t have to pull from anywhere.”
Some people avoid paying for LMI by getting their parents or close relatives to go guarantor on their loan.
But Ms Lehmann did not have the luxury of the so-called Bank of Mum and Dad.
“I didn’t have family to rely on (financially). I didn’t have a partner to rely on. It was just me doing this,” Ms Lehmann said.
It seeks to get Indigenous Australians into their own homes without LMI.
“There was a lot of paperwork,” Ms Lehmann said.
But after a year of waiting, the Bunurong woman was approved.
That saw Ms Lehmann buy a unit in Melbourne’s outer suburbs with just 5 per cent deposit and no LMI – however being on the scheme has some catches.
“I can’t get offset. I can’t redraw. I can’t consolidate any loans or anything like that,” she said.
“If I want to move out and use it as an investment property, I need to change banks.”
IBA also confirmed to ABC News that while its starting interest rates are as low as 1.14 per cent – these gradually increase over time or start higher depending on income levels.
“Our eventual interest rate for home loans may be higher than mainstream banks,” an IBA spokesperson said.
But for Ms Lehmann, these downsides are worth it.
“It’s really good. It’s my own place. I can paint a wall purple if I feel like it or, you know, break something and it’s mine.”
Other federal schemes proving popular
The federal government has been running several other similar schemes for first home buyers seeking to crack into the property market without LMI.
Its two first home loan deposit schemes (FHLDS), for people building new homes and for those buying existing ones, are getting people into the market with deposits as low as 5 per cent.
The schemes are done in tandem with a range of big banks and smaller lenders.
There are only 10,000 spots in each of those two schemes released each year, meaning securing a place is competitive, especially during a pandemic property boom.
Mansour Soltani is a mortgage broker who specialises in loans for first home buyers.
He said the two schemes for people with 5 per cent deposit have been very useful – but that he has been struggling to get single mothers into the newest scheme.
“We get around three enquiries a week and I have not been able to get any of these enquiries past the lender’s serviceability requirements,” he observed.
Mr Mansour said this is because single parents typically have lower incomes, plus higher overheads and debt levels from looking after children.
“I grew up in a single parent household, so it breaks my heart to not be able to help these desperate mums who just want to create a home of their own,” he added.
Mr Soltani is passionate about helping first home buyers avoid LMI as he sees it as “dead money”.
He said there are some loans being offered by specialist lenders in the market where LMI is waived for people with less then 20 per cent deposit.
Although, like some of the schemes, many of these products attract higher interest rates.
ABC News has also confirmed that some banks waive LMI on a case-by-case basis for people deemed as having stable professions, such as accountants or doctors.
Victorian government launching new scheme
The ABC can also reveal that the Victorian Government is set to launch a shared equity scheme for thousands of first home buyers struggling to get together a deposit.
The scheme will contribute money towards a person’s mortgage in exchange for a proportionate equity interest in the property.
“This reduces the size of the deposit required and will help Victorians afford their homes sooner,” a Victorian government spokesperson said.
“The fund will support the purchase of both established and newly built homes.”
The scheme was already piloted among 400 first home buyers. Its expanded version, which will be released soon, will cover 3,000 mortgages at a cost of $500 million.
Mortgage broker Mansour Soltani warned “the devil’s in the detail” when it comes to shared equity schemes.
“My understanding of that program is that the government will take an equity stake, let’s call it 20 per cent, in your in your property.
“Then what happens is, upon sale, you then return that back to the government or the taxpayer. So essentially, they just help you out with your deposit, but you still owe it to them and have to pay it back.
“We see this overseas, where governments are taking equity stakes in people’s properties to help them get onto the ladder.
“I think that having a solution like that is a far better way than what we have at the moment (with LMI).”
University of Sydney urban planner and policy analyst Nicole Gurran is also passionate about removing the LMI burden on new borrowers.
“We’ve got people who are really struggling to get into first home ownership, and we penalise them by giving them an even more expensive loan,” she argued.
“(Shared equity schemes) have been used in some states effectively, they’re used routinely internationally,.
“But one thing that we really want to do is tie any form of assistance that’s designed to help people pay their housing costs, we need to tie that with a supply side response as well.
“So governments need to do a lot more to make sure that we’re delivering affordable homes into the market.”