First home builders in Western Australia can avoid paying LMI by saving a 20% deposit, utilising government schemes like the First Home Loan Deposit Scheme, or potentially through family guarantees that use equity in a relative’s property.
For many first home buyers, LMI costs can add thousands to your home-building journey, with premiums varying based on your loan amount and deposit size. Some lenders offer LMI waivers for specific professions like doctors, accountants, and lawyers, so it’s worth investigating if your occupation qualifies for special considerations.
Key Information about LMI
- LMI is required when your deposit is under 20%, but can be avoided through targeted saving, government assistance schemes, or family guarantees.
- The cost of LMI varies significantly based on your deposit size, loan amount, and lender policies.
- Understanding your options early in the home-building process can save you thousands in upfront costs when entering the Western Australian property market.
- It’s important to note that LMI isn’t the same as mortgage protection insurance, which first home buyers may opt for to insure themselves in the event of not being able to make mortgage repayments
Understanding Lenders Mortgage Insurance (LMI)
The Purpose of LMI
The primary purpose of LMI is to reduce the risk for lenders when providing high Loan-to-Value Ratio (LVR) loans. This insurance allows banks and financial institutions to offer home loans to borrowers who haven’t saved a substantial deposit.
For many first home buyers in Western Australia, LMI makes property ownership possible sooner rather than waiting years to save a full 20% deposit. Without LMI, lenders would be less willing to approve loans with smaller deposits or would charge significantly higher interest rates.
How LMI Works in Home Loan Applications
When you apply for a home loan with less than 20% deposit, your lender will assess your LVR, the percentage of the property’s value you’re borrowing. Higher LVRs (smaller deposits) mean higher risk to the lender, resulting in larger LMI premiums.
The LMI premium is calculated based on several factors:
- Your loan amount
- Your deposit size (LVR)
- The property type (house, unit, land)
- Your loan purpose (owner-occupied or investment)
- Your employment status
LMI is typically a one-off payment added to your loan amount, though some lenders offer the option to pay lender mortgage insurance upfront. When capitalised into your loan, you’ll pay interest on the premium over the life of your loan.
Who Typically Pays LMI
You, as the borrower, are responsible for paying the LMI premium even though the policy protects the lender. This creates a situation where you’re paying for insurance that doesn’t directly benefit you.
First home buyers in Western Australia are the most common group required to pay LMI. With rising property prices in Perth and surrounding areas, saving a full 20% deposit is increasingly challenging for those entering the market.
The cost of LMI can range from a few thousand dollars to over $20,000 depending on your loan size and LVR. For example, on a $500,000 property with a 10% deposit, you might pay around $8,000-$10,000 in LMI.
Some professionals may qualify for LMI waivers through special lender programs, particularly those in stable, high-income professions like medicine, law, or accounting.
LMI Requirements for First Home Builders in Western Australia
Lenders Mortgage Insurance (LMI) significantly impacts the home buying process for West Australians entering the property market. Understanding the specific requirements can help you navigate this additional cost and potentially avoid it altogether.
Eligibility Criteria for First Home Buyers
First home buyers in Western Australia face specific LMI criteria when applying for home loans. Typically, LMI is required when your deposit is less than 20% of the property’s value. However, first home buyers may access special concessions.
The First Home Owner Grant (FHOG) provides $10,000 for those buying or building a new home, which can help boost your deposit. To qualify, you must:
- Be an Australian citizen or permanent resident
- Be at least 18 years old
- Have not previously received the FHOG
- Have not owned residential property in Australia before
- Intend to live in the home as your principal place of residence for at least 6 months
Typical Deposit Thresholds and LMI Triggers
LMI is typically triggered at specific loan-to-value ratio (LVR) thresholds:
Deposit Size | LVR | LMI Requirement |
20% or more | 80% or less | No LMI required |
15-19% | 81-85% | LMI required |
10-14% | 86-90% | Higher LMI premium |
5-9% | 91-95% | Highest LMI premium |
The LMI premium is a one-off, non-refundable payment added to your home loan. It’s calculated based on your deposit size and loan amount, typically ranging from 0.5% to 3% of your loan amount.
For a $500,000 property, a 10% deposit ($50,000) could mean paying approximately $8,000-$12,000 in LMI. This cost increases substantially with smaller deposits, making it worthwhile to save for at least a 20% deposit if possible.
Property Types and Impact on LMI
Different property types can affect your LMI requirements in Western Australia:
New Builds vs Established Homes: New builds often have more favourable LMI considerations. The New Home Guarantee allows eligible first home buyers to purchase newly built homes with just a 5% deposit without paying LMI.
Property Location: Properties in remote or regional WA may face stricter LMI requirements, with some lenders requiring larger deposits for homes in postcodes they consider higher risk.
Property Value Caps: LMI concessions and government schemes often have property price caps. In Perth, this cap is typically higher than in regional WA, reflecting the difference in property values.
Land and Construction Loans: Building your first home with a construction loan may have different LMI calculations compared to buying an established property.
State-Specific Considerations in WA
Western Australia offers unique advantages for first home builders looking to minimise or avoid LMI:
WA’s First Home Owner Rate of duty provides stamp duty concessions that can save you thousands, freeing up more funds for your deposit and potentially helping you avoid LMI altogether.
First home buyers building in new developments may qualify for additional incentives from developers, local councils, or the state government. These can include rebates, grants, or discounted land packages that effectively increase your deposit percentage.
Some WA lenders offer professional package discounts for certain occupations (like healthcare, education, or mining), which may include LMI waivers or discounts for loans with higher LVRs.
Strategies to Avoid or Reduce LMI When Building Your First Home
First home builders in Western Australia have several effective options to minimise or completely avoid Lenders Mortgage Insurance when building their dream home. Implementing these strategies early in your planning process can save you thousands of dollars.
Saving for a Larger Deposit
The most straightforward way to avoid Lenders Mortgage Insurance is by saving a deposit of at least 20% of the property’s value. While this may seem challenging, especially in Perth’s current market, it’s often worth the wait.
Consider these deposit-building strategies:
- Automated savings plans: Set up regular transfers to a high-interest savings account
- Reduce unnecessary expenses: Track your spending and cut non-essential costs
- Additional income sources: Take on extra work or sell unused items
For a $500,000 house and land package, your target would be a $100,000 deposit. Remember that every additional percentage point you save reduces your LMI premium significantly if you can’t quite reach the full 20%.
Using Government Grants and Incentives
Western Australia offers several government schemes that can help first home builders avoid LMI:
First Home Owner Grant (FHOG): Currently provides $10,000 for eligible first home buyers building a new home in WA. This grant can boost your deposit percentage.
First Home Loan Deposit Scheme: Allows eligible first home buyers to purchase with just a 5% deposit without paying LMI, as the government guarantees the remaining 15%.
Stamp duty concessions: First home buyers in WA may qualify for reduced stamp duty, freeing up more funds for your deposit.
Always check the latest eligibility criteria and available amounts as these programs may change over time.
Guarantor Loans and Parental Assistance
Family support can be a powerful way to avoid LMI costs when building your first home. A guarantor loan allows a family member (typically parents) to use equity in their property as security for part of your loan.
Key points about guarantor arrangements:
- The guarantor is only responsible for the portion they guarantee (often the 20% deposit amount)
- Once you’ve paid down enough of your loan or your property increases in value, the guarantor can be released
- Limited guarantees protect your family members from being responsible for your entire loan
Alternatively, some parents offer a monetary gift toward the deposit or an interest-free family loan. Always formalise these arrangements with proper documentation to prevent future misunderstandings.
Additional Considerations for Home Builders
When building your first home in Western Australia, understanding financial implications beyond LMI can significantly impact your budget and loan approval process. These factors need careful consideration to ensure your home building journey proceeds smoothly.
Comparing Loan Products Offered by Lenders
Different lenders offer various construction loan products with unique features tailored to home builders. Each product has distinct interest rates, fee structures, and flexibility during the construction phase.
When comparing loans, pay attention to:
- Progress payment schedules: How funds are released during construction stages
- Interest-only periods: Many builders benefit from paying only interest during construction
- Fixed vs variable rates: Construction loans often start variable before converting to your preferred structure
- Offset accounts: Some lenders offer these to reduce interest during the building phase
Look beyond the headline interest rate and examine the comparison rate which includes most fees and charges. Some lenders specialise in construction loans and may offer more favourable terms for first home builders despite not advertising the lowest rates.
Budgeting for Other Upfront Home-Building Costs
Building a home involves numerous expenses beyond your deposit and potential LMI. Failure to account for these can strain your finances.
Essential costs to budget for:
- Council and water authority fees: $5,000-$10,000
- Site preparation costs (especially for sloping blocks): $10,000-$30,000+
- Soil tests and contour surveys: $1,500-$3,000
- Bushfire attack level assessments (in at-risk areas): $700-$1,200
Don’t forget to allocate funds for temporary accommodation while your home is being built. This could add $15,000-$30,000 to your budget depending on rental costs in Perth and construction timeframes.
First home buyers should also research the First Home Owner Grant and stamp duty concessions available in Western Australia to offset these costs.
Seeking Professional Financial Advice
Professional advice can be invaluable when navigating the complexities of home building finance. A mortgage broker with experience in construction loans can help you find lenders offering products that match your specific circumstances.
Financial advisers can help you:
- Create a realistic budget that accounts for all building costs
- Develop strategies to potentially avoid paying LMI
- Structure your finances to maximise eligibility for government grants
- Plan for financial contingencies during the construction process
Many brokers don’t charge clients directly as they receive commissions from lenders. However, independent financial advisers typically charge consultation fees ranging from $200-$500 per hour.
Consider this cost an investment in ensuring you make informed decisions about what will likely be the largest financial commitment of your life.
Contact WOW Homes for More Information
Navigating the complexities of Lenders Mortgage Insurance (LMI) as a first home buyer can be challenging. Our team at WOW Homes specialises in helping Western Australian first home buyers understand their options.
We offer free, no-obligation consultations to discuss your specific circumstances and help you determine the best path forward for your first home journey.
Remember that stamp duty concessions and other government incentives may affect your deposit requirements and LMI situation. Our consultants stay up-to-date with the latest policies to ensure you receive accurate information.
Book an appointment today to discover how WOW Homes can help you achieve your dream of homeownership while potentially avoiding unnecessary LMI costs.