Avoid These LMI Mistakes When Applying for a Home Loan

What is Lenders Mortgage Insurance?

As a plumber working hard to achieve home ownership, you've probably heard the term Lenders Mortgage Insurance (LMI) thrown around when discussing home loan options. But what exactly is it, and why does it matter to your hip pocket?

Lenders Mortgage Insurance is a one-off premium that protects the lender - not you - if you borrow more than 80% of a property's value. Essentially, when your loan to value ratio (LVR) exceeds 80%, lenders see this as higher risk and require insurance to protect themselves.

Here's the thing: LMI can add thousands, sometimes tens of thousands of dollars to your loan amount. For a plumber looking to invest in property or secure their financial stability, understanding LMI can make a significant difference to your borrowing capacity and overall costs.

How LMI Costs Are Calculated

The amount you'll pay for Lenders Mortgage Insurance depends on several factors:

• Your loan to value ratio (LVR) - the higher it is, the more you'll pay
• The total loan amount you're borrowing
• Whether it's an owner occupied home loan or investment property
• The type of home loan product you choose

For example, if you're buying a property worth $600,000 with a 10% deposit ($60,000), you'll be borrowing $540,000. That's a 90% LVR, which could mean an LMI premium of anywhere from $15,000 to $25,000, depending on the lender and your circumstances.

The good news? You don't have to pay this upfront. Most borrowers add it to their loan amount, though this does mean you'll pay interest on it over the life of your home loan.

When You Might Need to Pay LMI

You'll typically need to pay Lenders Mortgage Insurance when:

1. You have less than a 20% deposit saved
2. You're refinancing and increasing your loan amount above 80% LVR
3. You're purchasing an investment property with a smaller deposit
4. You're using equity from another property but pushing the overall LVR above 80%

Many plumbers find themselves in this situation, particularly when buying your first home. Saving a 20% deposit while also running your own business or managing irregular income can be challenging.

LMI Waivers for Tradies

Here's where things get interesting for plumbers and other tradies. Some lenders offer LMI waivers for tradies as part of their home loan packages. These special arrangements recognise that qualified tradies, including licensed plumbers, often have stable income and valuable skills that translate to reliable borrowing.

These waivers can allow you to borrow up to 90% or even 95% of a property's value without paying LMI - potentially saving you tens of thousands of dollars. Not every lender offers these, which is why working with a broker who understands the trades industry makes such a difference.

Strategies to Avoid or Reduce LMI

If you're looking to minimise or avoid Lenders Mortgage Insurance altogether, consider these approaches:

Save a larger deposit: The most straightforward option is to save at least 20% of the property's value. While this takes longer, it eliminates LMI entirely and can improve your position when you apply for a home loan.

Use a guarantor: A family member (usually a parent) can use equity in their property to guarantee part of your loan. This can help you avoid LMI while entering the property market sooner. Learn more about guarantor loans for tradies.

Consider government schemes: Programs like the Home Guarantee Scheme can help eligible first home buyers purchase with as little as 5% deposit without paying LMI. The 5% Deposit Scheme for Tradies could be worth exploring.

Look for professional packages: Some lenders offer home loan products with reduced or waived LMI for certain professions, including qualified plumbers with established businesses.

Build equity quickly: If you do pay LMI initially, consider making extra repayments to build equity faster. Once your LVR drops below 80%, you might refinance to access better home loan rates and home loan features.

Comparing Home Loan Options with LMI

When calculating home loan repayments, don't forget to factor in LMI if applicable. This affects your overall comparison when you compare rates and home loan packages from different lenders.

Key factors to consider include:

• Variable rate vs fixed rate vs split rate options
• Interest rate discounts available for your profession
• Home loan features like offset account or linked offset facilities
• Principal and interest vs interest only repayment structures
• Portability if you need a portable loan for future property moves

A fixed interest rate home loan might provide certainty, but a variable interest rate loan often offers more flexibility with features like a mortgage offset account that can help you build equity faster. Many plumbers opt for a split loan arrangement, combining both variable home loan rates and fixed interest rate home loan portions.

Understanding Your LVR Over Time

Your loan to value ratio isn't static. As you make repayments and build equity, your LVR decreases. Property value increases can also improve your position. This is crucial because:

• Lower LVR improves your borrowing capacity for future purchases
• You can access additional funds or refinance to current home loan rates
• It positions you well if you're expanding your property portfolio
• You might qualify for rate discounts reserved for lower-risk borrowers

For self-employed plumbers, demonstrating strong financial stability and a decreasing LVR can significantly improve your position when accessing home loan options from banks and lenders across Australia.

Making Your Decision

Deciding whether to pay LMI or wait until you have a larger deposit is personal. Factors to consider include:

• Current property market conditions in your area
• Your job security and income stability
• How quickly property values are rising
• Your age and timeline for achieving home ownership
• Whether need lower repayments or can afford higher ones

Sometimes, paying LMI to enter the market sooner makes financial sense, particularly in rising markets. Other times, waiting to save more provides stronger long-term benefits.

The key is to access Home Loan options from banks and lenders across Australia and understand what works for your specific situation as a plumber. Getting Home Loan pre-approval can clarify your position and help you make informed decisions.

Whether you're looking at your first home loan, considering home loans for plumbers specifically, or exploring ways to secure your future through property investment, understanding LMI is crucial to making informed decisions about your home loan application.

Ready to explore your home loan options and find out if you can avoid LMI? Call one of our team or book an appointment at a time that works for you. We specialise in helping plumbers and tradies access the right home loan products with the home loan benefits that matter most to you.