For first-home purchasers, entering the buyer’s circle can seem overwhelming.
A report by mortgage insurer Genworth found 76.9 per cent of prospective first-home buyers believe that saving for a deposit is becoming increasingly difficult.
The same study shows that four in five (82.7 per cent) first-home buyers who plan to buy with less than a 20 per cent deposit are likely to use some form of mortgage insurance.
Saving consistently to build a deposit is only one rung on the property ladder. But rising house prices often get in the way of progression.
Lenders’ mortgage insurance (LMI) could offer an achievable solution.
With housing values appreciating faster than the cost of LMI, it can make financial sense to buy today and pay LMI, rather than holding out to save a bigger deposit only to end up paying more for a first home later.
What is lenders’ mortgage insurance?
Lenders’ mortgage insurance is usually a one-off payment made by the borrower at the time of loan settlement. Here is an LMI summary:
LMI is a type of insurance you can expect to pay if you borrow more than 80 per cent of your home’s value. LMI protects the lender – not the borrower. You don’t need to arrange LMI yourself – your lender will arrange it for you. It’s possible to save on LMI by accruing a bigger deposit.
How much does it cost?
This depends on where you borrow, your lender and the size of your deposit. Your broker can show you how to calculate mortgage insurance for your circumstances.
As a guide to the cost, Genworth features an online LMI estimator. It shows that a first-home buyer who purchases a property worth $500,000 with a 10 per cent deposit of $50,000 (and a home loan of $450,000) could face an LMI premium of about $8,600.
To avoid LMI altogether, the first-home buyer could save the extra $50,000 needed to have the full 20 per cent deposit of $100,000. But this will take time. And if property values climb higher, it becomes even harder to amass a 20 per cent down payment.
By getting into the market now, rather than waiting, the first-home buyer may pay $8,600 in LMI but they will pay $500,000 for their home, rather than waiting a year (or more) and paying $550,000 – a difference of $50,000.
In this way, LMI can be a valuable tool that helps first-home buyers beat rising property prices.
How LMI works
LMI is a type of insurance that applies if you have less than a 20 per cent deposit. First-home buyers don’t have to shop around for LMI; your lender will arrange it for you.
The catch is that LMI protects the lender – not you – if you can’t keep up the home loan repayments. So it’s often seen as a cost to avoid, especially as the one-off premium can be a substantial initial expense.
Managing the cost of LMI
Of course, all this doesn’t get around the fact that LMI premiums can be very high. However, there is a way to manage the cost.
Your lender may let you add the premium to your home loan in a process called ‘capitalising’ LMI. This allows you to pay off the cost gradually as part of your regular loan repayments. For further details about how LMI may work for you, contact your insurance broker or financial advisor.