Lenders mortgage insurance (LMI) is designed to protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.
It’s also one of the most expensive upfront costs for many borrowers when buying a property, generally payable on deposits of less than 20%.
As such, it could be a significant motivator for many borrowers to grow their deposit size in order to avoid paying thousands of dollars in LMI.
In fact, a recent Canstar survey of 1,024 Australian adults found one in three, or around 7 million people*, said first time buyers typically need a deposit size of 20% or more of the purchase price to get onto the property ladder.
But under the First Home Loan Deposit Scheme (FHLDS) – including the extension of the scheme for buyers of new home builds, including apartments – people aren’t required to pay LMI even if they have a deposit of as little as 5% of a property’s value.
For those who have been unable to secure one of the limited places in the FHLDS, there could be another option to avoid paying LMI or at least reduce the cost: finding a lender that offers a discount.
Some lenders offer discounts for eligible professional customers, such as ANZ with its LMI premium waiver for selected workers, such as physiotherapists, lawyers and optometrists. Terms and conditions, such as a minimum deposit, still apply.
There are also some banks who offer LMI discounts specifically targeted to first home buyers.
Canstar finance expert Steve Mickenbecker said this expands your shopping list as a first time buyer, with both the FHLDS and lender discounts available to make it a bit easier to enter the market, in addition to the First Home Super Saver Scheme (FHSSS, or FHSS).
He said you might check if you’re being offered a good overall deal – long-term – by asking some questions.
“Are the rates being offered as good as the rates these lenders offer on their other home loans?” Mr Mickenbecker said.
“If the rates are higher, you might be paying for lenders mortgage insurance in an interest rate differential.”
The difference in interest rates you pay over the life of a loan can make a huge difference to the amount you pay in mortgage repayments each month, and the total interest paid.
Lenders offering LMI discounts for first home buyers
Canstar’s team of research analysts examined a snapshot of LMI offers spotted on Canstar’s database to find out how much first home buyers could potentially save. The below list is sorted by the highest to lowest estimated LMI savings. Terms and conditions may apply and these offers may be varied or withdrawn at any time.
St. George, Bank of Melbourne & Bank SA
Westpac’s subsidiary banks offer $1 LMI for deposits upwards of 15% on Basic Home Loans and Advantage Package Home Loans, across fixed or variable rates, which were available to apply for from 13 July, 2020.
It’s estimated the offer could save borrowers $4,720, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
Virgin Money, which is owned by Bank of Queensland, currently has an offer to pay $0 LMI for deposits upwards of 15%, available to apply for from 24 September to 29 November this year, with applications needing to be settled by 30 May, 2021. Approved applicants would unlock special offer, limited time variable and fixed interest rates.
The offer could save borrowers an estimated $4,713, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
RAMS, which is also owned by Westpac, is currently offering a discount of up to $5,000 on LMI for deposits upwards of 5%, with a premium payable of at least $1. This offer is available to apply for with new owner occupier and investment loans on principal and interest repayments from 13 July.
It’s estimated the offer could save borrowers $4,249, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
Heritage Bank currently has a $2,000 cashback offer for first home buyers who purchase their home with LMI. Applications are open from 1 October this year and need to settle by 28 February, 2021, with the cash paid within 60 days of settlement. The offer is available to apply for on owner occupier or investment discount variable rate loans; and standard variable, fixed rate and the Home Advantage Package loans.
The offer could save borrowers an estimated $2,000^ off what would have cost $4,713, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
Bank Vic has an offer to apply for 30% off LMI fees upon settlement for borrowers with deposits of between 10% and 15%. The offer applies to the First Home Loan Package loan and is available to apply for from 1 September.
It’s estimated the offer could save borrowers $1,414 off what would have cost $4,713, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
Industry super fund-owned ME Bank currently has a 25% discount on LMI for deposits upwards of 5%, available to apply for on the Flexible Home Loan without package which has reduced interest rates for first home buyers, according to ME. Applications were open from 28 September and close 20 November, and the loan must be settled by 26 February, 2021.
The offer could save borrowers an estimated $1,178 off what would have cost $4,713, and one year and seven months worth of time that would have been needed to save up to a full 20% deposit on a $500,000 loan.
Source: www.canstar.com.au – 16/10/2020. Offer details based on advertised offers. LMI quotes obtained on 16/10/2020. LMI based on LMI for a first home buyer in NSW purchasing a owner occupier existing property with a value of $500,000 and a deposit of $75,000. LMI estimates obtained from the following calculators: Bank Vic & ME Bank – QBE LMI Connect; RAMS – RAMS Home Loan Upfront Costs Calculator; St George, Bank of Melbourne, Bank SA – St George Stamp Duty and LMI Calculator; Virgin Money – Genworth LMI Premium Estimator. Estimated time taken to save an extra 5% deposit based on saving a 20% deposit, rather than a 15% deposit, and includes the following assumptions: starting income of $89,123 (ABS Average Weekly Earnings; May 2020), wage growth of 2.5% p.a., property price growth of 2.5% p.a., 20% of before tax income deposited into a savings account, a savings interest rate of 0.98%, and tax on interest at the relevant marginal tax rate. List sorted in descending order by estimated LMI savings. ^Estimated LMI savings apply the $2,000 cashback to the cost of LMI for comparison purposes.
*7 million people is based on ABS data that revealed the number of Australians aged 18+ is 19,746,647 (December 2019).
If you’re currently considering a home loan, the comparison table below displays some of the variable rate home loans on our database with links to lenders’ websites that are available for first home buyers. This table is sorted by Star Rating (highest to lowest), followed by comparison rate (lowest-highest). Products shown are principal and interest home loans available for a loan amount of $350K in NSW with an LVR of 80% of the property value and that offer an offset account. Before committing to a particular home loan product, check upfront with your lender and read the applicable loan documentation to confirm whether the terms of the loan meet your needs and repayment capacity. Use Canstar’s home loan selector to view a wider range of home loan products.
*Comparison rate based on loan amount of $150,000 and a term of 25 years. Read the Comparison Rate Warning