Can I avoid paying LMI with a personal loan?

Rates and Fees verified correct on December 5th, 2016

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 December 5th, 2016
$
Loan purpose
Offset account
Loan type
Your filter criteria do not match any product
Interest Rate (p.a.) Comp Rate^ (p.a.) Application Fee Ongoing Fees Max LVR Monthly Payment
NAB Choice Package Home Loan - 2 Year Fixed (Owner Occupier)
Enjoy a fixed home loan with discounts on rates and other NAB products.
3.75% 4.87% $0 $395 p.a. 95% Go to site More info
Greater Bank Great Rate Discount Variable with Family Pledge Home Loan - Up to 110% LVR
Discounted rate available with family pledge loans. Family pledge loans require no LMI and no deposit. NSW, Qld and ACT only.
3.89% 3.89% $0 $0 p.a. 110% Go to site More info
NAB Base Variable Rate Home Loan - Owner Occupier (P&I)
A competitive no frills home loan with no application fees for a limited time. 250,000 Velocity Frequent Flyer point offer, conditions apply.
4.10% 4.14% $0 $0 p.a. 95% Go to site More info
NAB Tailored Fixed Rate Home Loan - 3 Year Fixed (Owner Occupier)
Flexible fixed rate home loan which will allow you to take a break from repayments if you're ahead of scheduled repayments. 250,000 Velocity Frequent Flyer point offer, conditions apply.
3.99% 5.04% $600 $8 monthly ($96 p.a.) 95% Go to site More info
IMB Essential Home Loan - LVR > 80% (Owner Occupier)
Enjoy a 100% offset account and no monthly fees.
4.31% 4.33% $0 $0 p.a. 95% Go to site More info
NAB Tailored Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
A fixed rate home loan with the ability to lock the interest rate at the time of loan approval for up to 3 months. 250,000 Velocity Frequent Flyer point offer, conditions apply.
3.85% 5.12% $600 $8 monthly ($96 p.a.) 95% Go to site More info
ANZ Fixed Rate Home Loan - 2 Year Fixed (Owner Occupier)
Lock in your rate for 2 years with an interest only option.
3.90% 5.06% $600 $10 monthly ($120 p.a.) 95% More info
Westpac Flexi First Option Home Loan - 3 Years Introductory Special Offer (New Owner Occupier, P&I)
A limited time deal for new owner occupiers. Advertised rate includes 1.03%p.a. discount for the first two years.
3.99% 4.37% $0 $0 p.a. 95% More info
St.George Fixed Rate Advantage Package -  2 Year Fixed Rate (Owner Occupier)
A discounted package rate for owner occupiers with the ability to package a Qantas rewards earning Amplify credit card. $1,500 cash back available for refinancers, conditions apply.
3.99% 5.07% $0 $395 p.a. 95% More info
Commonwealth Bank Wealth Package Fixed Home Loan - 2 Year Fixed (Owner Occupier)
Fee free extra repayments available during the fixed term. $1,250 cash back offer for refinancers. Conditions apply.
3.99% 5.00% $0 $395 p.a. 95% More info
Beyond Bank Basic Variable Rate Loan - (Owner Occupier)
Enjoy 100% offset account with redraw facility and borrow up to 95% LVR with low monthly service fee.
4.40% 4.57% $445 $11 monthly ($132 p.a.) 95% More info
ING  DIRECT Orange Advantage Loan - $150,000+ (LVR > 90% Owner Occupier)
A fully featured home loan with an offset account and discounts available.
4.65% 4.86% $0 $199 p.a. 95% More info
Commonwealth Bank Standard Variable Home Loan - Owner Occupier
Standard variable home loan with a low doc option for self-employed borrowers.
5.22% 5.37% $600 $8 monthly ($96 p.a.) 80% More info
Credit Union SA Variable Rate Home Loan - $20k and above (Owner Occupier)
A variable home loan that allows you to borrow from $20,000.
5.19% 5.25% $600 $0 p.a. 80% More info
Suncorp Bank Standard Variable Rate Home Loan  - (Owner Occupier)
Enjoy a competitive interest rate, make fee free extra repayments and a redraw facility.
5.40% 5.56% $990 $10 monthly ($120 p.a.) 95% More info
ANZ Breakfree Home Loan Package  - $250,000 up to $499,999 (LVR >80% Owner Occupier)
Pay no application fee with 100% offset account with redraw facility and borrow up to 95% LVR.
4.50% 4.60% $0 $395 p.a. 95% More info
Bank of Melbourne Basic Home Loan - Regular Rate (Owner Occupiers, P&I)
Ideal for first home owners or anyone who wants a no-frills, basic variable rate home loan.
4.64% 4.69% $500 $0 p.a. 95% More info
St.George Basic Home Loan - Promotional Rate (Owner Occupier, P&I)
A no frills loan with a competitive rate and a maximum LVR of 95%.
4.08% 4.09% $0 $0 p.a. 95% More info
Westpac Rocket Repay Home Loan - Principal and Interest
The Westpac Rocket Repay Home Loan lets borrowers to own their home sooner with a 100% offset to save on interest.
5.29% 5.43% $600 $8 p.a. 95% More info

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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