Having a Loan to Value Ratio (LVR) of more than 80% is a huge risk for the banks so mortgage insurance is applied to your home loan in order to protect the lenders just in case you default on your mortgage.
The worst part is, this will be an additional cost on top of the deposit you’ve already saved!
For example, even if you saved up a $60,000 deposit on a $550,000 property, you’d still be borrowing close to 90% of the property value and would need to come up with over $10,500 for LMI! Try our Lenders Mortgage Insurance calculator to discover how much you could save on your LMI premium.
Even if you’re not in a position to have LMI waived, there are 3 ways to get cheaper LMI!
1. Make your credit score shine
Let’s face it, you’ve probably never heard of LMI before but the reality is that it’s actually a major reason for the banks declining your application.
The reason is that many people are either not aware that they have a credit score or the actual state that it’s in. Think of a credit score as a bank’s way of rating you as a borrower.
The score is based on the information found in your credit file including such details as your current asset position, how long you’ve been at your current address, number of credit enquiries you’ve had over the past two years and any history of defaults and bankruptcy.
The better your credit score, the more lenders you can apply with. The more lenders you can apply with, the more likely it is that we can get you a low LMI premium.
The reason is each lender scores differently. In fact, some don’t use credit scoring at all!
So how can you improve your credit score?
Well, you should:
- Save a larger deposit: In particular, make sure you meet the genuine savings criteria of your lender.
- Try not to take out any finance: Avoid applying for credit cards or personal loans for up to six months before you make an application for a home loan. In addition, only apply for a home loan with one lender at a time.
- Show stability: Try to only apply for a loan after you’ve been at your current job and place of residence for a minimum of 6 months. Luckily, there are some lenders that have more lenient scoring for people who’ve just changed jobs or addresses.
- Prove a rental history: Renters that can prove a perfect payment history have better scores than people who are living with their parents.
- Manage your accounts: Never overdraw your cheque account, allow a direct debit to get declined or go over the limit on your credit card. Being just a day late with a loan repayment will flag you as a risky borrower.
Although these tips will help, your best bet is to find out how a particular lender will assess your application. The problem is that applying with multiple lenders will actually add damaging enquiries to your credit file, ultimately affecting your credit score.
Our mortgage brokers are experts in credit scoring and they can tell you which banks will accept your application.
Call us on 1300 889 743 or complete our free assessment form and we can properly assess your situation avoiding you from getting knocked for a loan by a lender’s LMI provider.
Get an estimate of your credit score by using our calculator.
2. Have a good look at the premium rate card
When looking for a home loan, you’re most likely only focusing on the interest rate and whether you want to go fixed or variable. Many people fail at reducing their LMI because they don’t think to look at the premium rate card.
The problem is that banks – as the honest pillars of our economy that they are – don’t exactly make this information available to the general public.
Here’s the scoop: lenders break up their premium rates depending on the percentage of the property value that you are borrowing (LVR).
By taking a look at the premium rate card, you’ll see that you can immediately reduce your LMI premium by reducing your LVR, thereby falling into a lower LMI premium bracket. Think of it like tax brackets with the Australian Taxation Office.
Most mortgage brokers and bank staff don’t play around with your loan amount to try to get you the lowest premium. Instead, they tend to just set up your loan at 90% or 95% LVR, even though you may be in a position to reduce the amount you’re borrowing to get a cheaper LMI premium.
LMI premiums jump up significantly the moment you borrow over $300,000, $500,000, $750,000 and $1,000,000 so try to find a cheaper property or negotiate a better price before diving in.
Even reducing your LVR by just 2-3% can have a big impact on the premium you’re liable to pay.
For example, if you want to borrow $950,000 for a $1 million property, your LVR would be 95%, bringing your total LMI premium to $36,284.
Unfortunately, many lenders don’t allow you to capitalise LMI over 97% LVR which means you can only borrow up to $970,000 and you’ll need to come up with the remaining $16,284 for LMI.
You can reduce the LMI premium by as much as $2,285 by saving up a little more for your deposit and bringing the LVR down to 93.6% ($936,000).
Alternatively, you can get the exact LMI premium you’ll be expected to pay for your home loan with our LMI calculator.
3. Borrowing against multiple properties? Apply with separate lenders
Cross securitisation is where one loan is secured by multiple properties.
If you had three properties valued at $300,000 and you wanted to borrow 90% of the value of the properties, you would actually be better off applying for three loans with one on each property (standalone applications) rather than one loan over all three properties (cross securitised).
For example, if you were to take out one loan of $810,000 lent against $900,000, then the total premium would be $14,807.
However, if you took out three separate loans of $270,000 for each property ($810,000 in total), the combined premiums amount to $8,637. That’s a saving of $6,170!
As mentioned previously, LMI is charged at a much lower rate for loans under $300,001 than compared to a loan for over $750,000.
Our mortgage brokers are credit experts and they know exactly how to get LMI discounted or even waived. Find out how we can help you by calling us 1300 889 742 or by completing our free assessment form today.