Lenders Mortgage Insurance (LMI) is a term often misunderstood. As a general rule, LMI is triggered when borrowing in excess of 80% of purchase price or bank valuation. The cost of LMI can be huge as it adds significant cost when buying property, however if you are employed in a certain profession, you may be one of the lucky ones to avoid paying for it.

What is LMI?

A high loan to valuation home loan is considered high risk for lenders and therefore the debt is insured in the event of a default. This type of insurance protects the lender, not the borrower.

The cost of LMI ranges between 1% and 3% of the loan amount – with the premium increasing as the gearing increases against the property. LMI is a one-off cost and not a recurring premium.

In the event of mortgage default, the lender will sell your property, and if the outstanding loan balance cannot be repaid from the proceeds in full, the lender makes a claim to the mortgage insurer.

Does LMI apply to everyone?

As a general rule, LMI is triggered once the Loan to Value Ratio (LVR) exceeds 80%. However in some cases, a handful of lenders will waive the LMI premium just by being a member of a certain profession.

Right now first home buyers may also qualify for an LMI waiver under the government’s first home loan deposit scheme (refer to a blog I wrote on this very topic earlier this year). A further 10,000 scheme places are about to come onto the scene on July 1, 2020.

Over the years, we have assisted many of our clients with LMI waivers, which can cost tens of thousands. Not all lenders offer LMI waivers – in fact there are only a handful of lenders with an appetite for LMI waivers… which highlights the worth of an experienced Mortgage Broker in your corner.

To qualify for an LMI waiver, the applicant must have a squeaky-clean credit file no matter what profession or background you come from.

Who can access LMI waivers?

LMI waivers were originally introduced for medical professionals – later extended to include other professions such as the legal profession, accountants, professional athletes, entertainment industry professionals, and mining specialists.

At time of writing (June 2020), first home buyers – who meet a strict criteria – may also qualify to avoid the cost of LMI under the government’s First Home Loan Deposit Scheme.

Why is it only some professionals qualify for LMI waivers?

Rightly or wrongly, lenders consider certain professionals low-risk borrowers mainly because of their higher than average salary earnings, and they are usually higher net worth individuals. Further, certain professions are recession proof – medicos is a very good example of this.

Lenders also understand that these high-grade borrowers associate with like professionals, and therefore they usually become good advocates for their chosen bank and/or lender.

The professions that qualify for an LMI waiver (at time of writing) include…#

1. Medical professionals

  • Must be a member of the Australian Medical Association (AMA)
  • Must be on the approved list (e.g. doctors, surgeons, dentists, optometrists, pharmacists, chiropractors, and veterinarians)
  • Ability to access up to 100% of the property’s value
  • Maximum loan amount $4.5million

2. Legal professionals

  • Must be a member of a relevant organisation
  • Must be on the approved list (e.g. solicitors, barristers, judges, and lawyers)
  • Must be earning a minimum salary of $150,000 per annum
  • Maximum exposure against the property is 90%
  • Maximum loan amount $2million

3. Accountants

  • Must be a member of a relevant organisation (e.g. Australian Chartered of Accountants, CPA Australia)
  • Must be on the approved list (e.g. accountants, chief financial officers, financial controllers, finance managers, and actuaries)
  • Must be earning a minimum salary of $150,000 per annum
  • Maximum exposure against the property is 90%
  • Maximum loan amount $2million

4. Professional athletes

  • Must be a professional athlete (e.g. an AFL player)
  • Ideally the applicant should have an accredited agent or manager
  • Must be earning a minimum salary of $150,000 per annum
  • Maximum exposure against the property is 90%
  • Maximum loan amount $2million

5. Entertainment industry professionals

  • Relates to those working in fashion, theatre, television, or the music industry
  • Must be earning a minimum salary of $150,000 per annum
  • Maximum exposure against the property is 90%
  • Maximum loan amount $2million

6. Mining specialists

  • Relates to those working in resource, energy or mining industries
  • Must be on the approved list (e.g. geophysicists, geologists, quantity surveyors, and mine surveyors)
  • Must be earning a minimum salary of $150,000 per annum
  • Maximum exposure against the property is 90%
  • Maximum loan amount $2million

How to avoid paying LMI if you are not on the above list of professions?

If you do not belong to any of the above professional groups, there are several other ways to avoid the cost of LMI. These include…

  • Saving the full 20% deposit
  • Apply for a family guarantor home loan (assuming this is an option available to you) – refer to a prior blog I wrote on this very topic for more information
  • If you’re a first home buyer, you may qualify for the government’s First Home Loan Deposit Scheme and access up to 95% of purchase price with LMI paid by the government (relates to purchases only)

In closing, a timely reminder…

Whilst LMI can be seen as a huge cost and an additional burden to property ownership, LMI can also be your secret weapon.

LMI is an enabler to home ownership or as part of a wealth creation strategy. Refer to a blog I wrote some time ago on this very topic.

Decades ago, banks would lend a maximum of 80% of a property’s value, limiting access to credit for many people.

Since banking deregulation was introduced in the 1970’s, higher LVR loans were made possible, enabling many people to take advantage of buying property as the requirement for a 20% deposit was no longer seen as a barrier.

If you qualify for an LMI waiver considering my comments above – then bonus..!! If you don’t qualify for an LMI waiver, you should still consider if now is the right time to build on your property portfolio as part of your overall wealth creation strategy.

If you have the borrowing capacity and affordability to buy property, history suggests that time in the market is the secret to building wealth through the power of residential property.

Disclaimer: #These LMI waivers are subject to specific lender policy and will vary from lender to lender. Subject to lenders terms, conditions, and credit criteria.
The Information is general in nature and does not take into account your particular investment objectives or financial situation. It does not constitute, and should not be relied on as, financial or investment advice or recommendations (expressed or implied) and is not an invitation to take up securities or other financial products or services. No decision should be made on the basis of the information without first seeking expert financial advice. Your full financial needs and requirements would need to be assessed prior to any offer or acceptance of a loan product. Subject to lenders terms and conditions, fees and charges and eligibility criteria apply.