Gateway Bank introduces monthly LMI option for low deposit home buyers

couple-sitting-on-couch-looking-at-LMI

There’s a common conundrum for many first time home buyers in Australia: save up for a 20% home loan deposit or purchase sooner with the added cost of lenders mortgage insurance (LMI).

It’s not an easy choice, particularly when LMI can cost thousands or tens of thousands of dollars - an expense which borrowers are typically required to either pay upfront or have ‘capitalised’ (added on to) their loans.

Customer owned lender Gateway Bank might have a more ‘flexible’ solution for their mortgage customers though, with yesterday’s announcement that it will now allow borrowers to pay their LMI premiums in monthly instalments.

According to Gateway, this is the first time an Australian bank has put this option on the table, and while it doesn’t do away with lenders mortgage insurance altogether, it could allow first time buyers to buy sooner, without that sizeable upfront cost.

“We want to help more Australians achieve their dream of home ownership,” says Gateway Bank chief executive, Lexi Airey. “It’s no secret that the biggest challenge for most first home buyers is saving for a 20% deposit, not whether they can afford the home loan repayments.”

“So, we partnered with Genworth, our LMI provider, to offer our customers who are buying their first home the flexibility to pay for LMI monthly.”

“Because the monthly LMI premium doesn’t affect your LVR, a greater portion of your loan can be used to buy your home. It might make the difference between buying your home now, instead of in another year or two.”

So what are the actual benefits? As Airey alluded to, there are a couple of potential advantages to the monthly LMI structure:

  • No impact on LVR: Unlike lenders mortgage insurance which is capitalised into the loan, Gateway says monthly LMI premiums won’t impact a borrower's loan-to-value ratio (LVR). That could help prospective buyers save up for a deposit faster - potentially up to 95% of the property’s value.
  • Payments stop at 80% LVR: Again, unlike LMI which is capitalised into the loan and paid off over time, monthly LMI premiums are paid separately. So once a borrower's LVR falls below the 80% threshold, monthly premium payments will stop.

As the chart below shows though, the benefit of the monthly LMI structure will likely be greatest for mortgage holders who are able to pay down their loan quickly.

Upfront vs Monthly LMI cost comparison
Upfront vs monthly LMI cost comparison. Source: Gateway Bank

Today’s announcement from Gateway is a timely one given that first time buyers are taking out home loans in near-record numbers.

The latest figures from the Australian Bureau of Statistics (ABS) show that 16,117 first home loan commitments were made in February which - while a slight drop on January’s figure - represent a 65.8% increase on the February 2020 number.

First home buyers have also continued to take advantage of the First Home Loan Deposit Scheme (FHLDS), with the federal government having recently reissued 1,800 spots for buyers looking to purchase an existing home.

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