As a tradie looking to buy your first home or investment property, you've probably heard the term "lenders mortgage insurance" or LMI thrown around. But what exactly is it, and how does it affect your home loan application?
Let's break down everything you need to know about LMI and how it fits into your home buying journey.
What Is Lenders Mortgage Insurance?
Lenders mortgage insurance is a one-off premium that protects the lender (not you) if you can't make your home loan repayments. It's typically required when your loan amount exceeds 80% of the property's value – what we call the loan to value ratio (LVR).
Here's how it works: if you're buying a home worth $500,000 and you have a $50,000 deposit (10%), your LVR is 90%. Since this exceeds the 80% threshold, you'll need to pay LMI.
When Do You Need to Pay LMI?
You'll generally need LMI when:
• Your deposit is less than 20% of the property value
• You're refinancing and your LVR exceeds 80%
• You're accessing equity from your existing property and the combined LVR is above 80%
The good news? Some lenders offer LMI waivers for certain professions, and as tradies, you might qualify for specific programs that can help reduce or eliminate this cost.
How Much Does LMI Cost?
LMI costs vary based on several factors:
• Your loan amount
• The LVR percentage
• The lender you choose
• Your financial situation
For example, on a $400,000 home loan with a 10% deposit, LMI could cost anywhere from $8,000 to $15,000. This might seem like a lot, but remember – it allows you to enter the property market sooner rather than waiting years to save a 20% deposit.
Can You Add LMI to Your Home Loan?
Yes, most lenders allow you to capitalise the LMI cost, meaning you can add it to your loan amount rather than paying it upfront. While this increases your total borrowing and means you'll pay interest on the LMI amount over the life of your loan, it can help with cash flow when buying a home.
LMI and Your Borrowing Capacity
When Home Finance & Mortgage Brokers assess your application, they consider how LMI affects your borrowing capacity. The insurance premium is factored into your total loan amount, which can impact how much you can borrow overall.
As tradies, your income structure might be different from traditional employees. You might have:
• Variable income based on contracts
• Seasonal work patterns
• Multiple income sources
• Business expenses that affect your taxable income
This is where working with mortgage brokers who understand the trades industry becomes valuable. We can access home loan options from banks and lenders across Australia that cater specifically to tradies' unique financial situations.
Interest Rates and LMI
Having LMI doesn't typically affect your interest rate directly. You can still access:
• Variable interest rate options
• Fixed interest rate home loans
• Interest rate discounts
• Offset account features
When calculating home loan repayments, remember that if you've capitalised your LMI, your repayments will be slightly higher due to the increased loan amount.
The Application Process with LMI
Applying for a home loan with LMI follows a similar streamlined application process:
- Get pre-approved to understand your borrowing capacity
- Provide necessary documentation (bank statements, income proof, etc.)
- Find your property
- Submit your formal home loan application
- LMI assessment occurs as part of the approval process
Alternatives to LMI
While LMI enables you to buy with a smaller deposit, there are alternatives worth considering:
• Family guarantee loans (using family property as security)
• First Home Guarantee Scheme (government-backed program)
• Professional packages that waive LMI for certain occupations
• Saving for a larger deposit to avoid LMI altogether
Making LMI Work for You
Despite the additional cost, LMI can be a valuable tool for tradies wanting to enter the property market. Consider these benefits:
• Enter the market sooner with less upfront cash
• Take advantage of current property market conditions
• Start building home equity earlier
• Avoid paying rent while saving for a larger deposit
• Potential tax benefits if purchasing an investment property
Getting Started
Before diving into home loan options, it's worth getting home loan pre-approval. This gives you a clear picture of your borrowing capacity, including any LMI costs, so you can shop for properties within your budget.
Remember, stamp duty is another cost to factor in alongside LMI when budgeting for your home purchase.
As mortgage brokers specialising in the trades industry, we understand that every tradie's financial situation is unique. Whether you're dealing with variable home loan rates, looking at fixed interest rate options, or trying to understand how LMI fits into your overall home buying strategy, we're here to help you find the right solution.
Call one of our team or book an appointment at a time that works for you – we'll work around your job site schedule to make sure you get the support you need for your home loan journey.
