Can I avoid paying LMI with a personal loan?

Find out if it’s possible to avoid one of the most expensive upfront costs of a home loan with a personal loan

Avoid LMI with a persona loan

Lender’s Mortgage Insurance (LMI) is one of the greatest costs of buying a home loan if you don't have a deposit of 20% or more, so we explored whether or not it's possible - and cost effective - to avoid it by taking out a personal loan.

LMI is a premium payable to the lender in the event that you default on your loan. It acts as security to lenders who consider you as a ‘high risk’ borrower, e.g if you're borrowing more than 80% of the value of the property, or if you're a low doc borrower - more than 60%.

In most cases, if your deposit is under the minimum required by your lender, you’ll need to pay LMI. Without paying the LMI, your lender won’t release the funds required to purchase your property, unless you choose to take out a personal loan.

You can pay LMI either as a one off lump sum at the establishment of your loan, or it can be capitalised into your repayment schedule over the course of the loan. This means it will be added to the principle of your loan, which will attract an interest charge.

Did you know? Even if your loan is approved by your lender, don’t assume that you will be eligible for LMI. Australian providers may deem you ineligible to pay LMI based on factors such as your income. In the event that you are rejected for LMI by one of the major providers, such as QBE or Genworth, you may want to apply with a lender who uses a different LMI provider, or one which self-insures themselves.

How To Avoid Paying LMI Through a Personal Loan

LMI can be avoided by taking out a personal loan to finance the gap between the amount borrowed for the home loan and the remaining value of the property’s purchase price. While this approach can be useful in a number of circumstances, taking out a personal loan to avoid LMI can work out to be more expensive down the track.

Nevertheless, people now have the chance to borrow more than 80% of a property’s purchase price and avoid paying high LMI premiums.

There are some lenders that will even consider a 90% lend if you have 5% in genuine savings and are borrowing a small amount from the personal loan to make up the difference.

Needless to say, if you are looking to avoid LMI you will need to meet certain criteria, such as proving full time employment, genuine savings and a positive credit history.

Does Avoiding LMI Actually Save You Anything?

So when you avoid paying LMI by taking out a personal loan, will it actually save you money in the long run?

We’ve put together a hypothetical situation that highlights the differences between the cost of a home loan when LMI is paid, compared with the cost of avoiding LMI by taking out a personal loan.

All calculations are provided for illustrative purposes only.

Harriet and James

avoid LMI with a personal loan

Using the Genworth LMI Premium estimator, we can work out the LMI premium payable on a home loan.

To demonstrate, Harriet and James are looking to buy their first home in Surry Hills with an estimated property value of $600 000 with a 15% deposit. They would like to borrow 85% of the purchase price over a loan period of 30 years.

They received a gift from their parents to help them buy a home, which they'll use to pay the LMI upfront. In this case, the LMI premium would amount to $6 579 (excluding stamp duty).

Estimated Property ValueDeposit AmountLoan TermLMI Payable
$600 000$90 00030 years$6 579

However, if the couple hadn’t received the gift, and instead decided to capitalise the LMI into their loan over 30 years with 5% interest, the additional repayment would be $50 per month, or a total of $12 714.29.

Avoiding LMI By Taking Out a Personal Loan

On the other hand, if Harriet and James were not eligible for LMI or wanted to avoid it, they may decide to take out a personal loan to finance the remaining 5% of the property price. If they took out a personal loan with 13.95% interest, the monthly repayments would be $561 over a 7 year period, and the total interest payable would be $17 155.

Loan AmountInterest rateLoan TermInterest costTotal Loan Cost
$30 00013.957 years$17,155$47 155

The total cost of this personal loan would therefore be $47 155.

However, if Harriet and James realised that the maximum loan period of 7 years for the personal loan was going to cost them too much in interest, they might try to pay off the loan in a shorter time period of just 1 year. With 13.95% interest, the monthly repayments would now be $2 693 and the total interest payable would be $2 315.

Loan AmountInterest rateLoan TermInterest costTotal Loan Cost
$30 00013.951 year$2,315$32 315

The total cost of the loan for 1 year would be $32 315.

From this calculation, we can see that it would be cost effective for the couple to pay the LMI upfront to avoid the high interest charged on the personal loan. However, it is important to remember that the interest and duration of these loans will vary significantly depending on the lender and LMI provider.

Compare home loans with guarantor options

The loans below allow you to use a guarantor to help avoid LMI, and many of them also allow you to borrow up to 95% of the property value.

If you're still interested in using a personal loan to avoid LMI, you can also start a comparison of them too.

Rates last updated May 23rd, 2018
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Name Product Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment Short Description
3.69%
3.71%
$0
$0 p.a.
80%
Family guarantee option available. Enjoy flexible repayments and a low minimum loan amount.
3.98%
5.13%
$600
$8 monthly ($96 p.a.)
95%
A fixed rate home loan with additional repayment options.
4.09%
4.12%
$0
$0 p.a.
95%
Buy a home with just a 5% deposit and get flexible repayment options and a redraw facility.
3.74%
3.74%
$0
$0 p.a.
110%
Pay no deposit or LMI and get a discounted rate with this family pledge loan. Requires a family member to act as guarantor. NSW, Qld and ACT only.
4.04%
5.05%
$600
$8 monthly ($96 p.a.)
95%
Fix in a competitive rate for three years.
4.75%
5.05%
$0
$299 p.a.
95%
A fully featured home loan with an offset account and discounts available.
4.14%
5.06%
$600
$10 monthly ($120 p.a.)
95%
Get a 2-year fixed rate with flexible repayment options to help you save.
3.89%
4.96%
$0
$395 p.a.
95%
Refinancers can get $1,500 cashback. Conditions apply. Package your home loan with a Qantas rewards earning Amplify credit card.
3.89%
4.97%
$0
$395 p.a.
95%
Get discounts on a range of Commonwealth Bank products and enjoy the option of fee-free extra repayments during the fixed term.
4.29%
4.87%
$0
$395 p.a.
95%
You can save on a host of Westpac products by packaging your 5-year fixed rate home loan.
5.60%
5.79%
$600
$10 monthly ($120 p.a.)
95%
Enjoy a competitive interest rate, make fee free extra repayments and a redraw facility.
4.45%
4.85%
$0
$395 p.a.
95%
Pay no application fee with 100% offset account with redraw facility and borrow up to 95% LVR.
4.62%
4.67%
$500
$0 p.a.
95%
Ideal for first home owners or anyone who wants a no-frills, basic variable rate home loan.
5.24%
5.38%
$600
$8 monthly ($96 p.a.)
95%
The Westpac Rocket Repay Home Loan lets borrowers to own their home sooner with a 100% offset to save on interest.
4.70%
5.09%
$0
$395 p.a.
95%
A package home loan with discounted interest rate.

Compare up to 4 providers

Should LMI Be Avoided By Taking Out A Personal Loan?

As reflected in the above example, it's more expensive to avoid paying LMI by taking out a personal loan. Although LMI is designed to protect the lender, you can also benefit from paying the insurance upfront and not incurring the high interest rates of a personal loan.

Avoiding LMI by taking out a personal loan will add an additional line of credit next to your account which could negatively impact your credit score.

With a strengthening property market, the value of property is likely to increase and so paying LMI now could be more beneficial than paying off the additional loan (and interest cost) in future.

Paying LMI will also enable you to enter the property market sooner and it could provide you with greater capital gains than you would receive by saving the 20% deposit or taking out a personal loan.

If you are thinking about avoiding LMI by taking out a personal loan, it is recommended that you consult your lender directly to discuss the terms and features of their loans, as well as their LMI provider policies.

Belinda Punshon

Belinda is a journalist here at finder.com.au. Specialising in the home loans and property sections, she is passionate about helping Australians improve their financial wellbeing.

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