Saving a deposit for a home is indisputably one of the major hurdles facing first-time purchasers. As house prices continue to rise, the amount required for a 20% deposit also inflates, and the goal of purchasing a home becomes all the more onerous. Under these conditions, it’s unsurprising that an increasing number of purchasers are instead taking out Lenders Mortgage Insurance (LMI) in return for their lender agreeing to a higher loan with a smaller deposit.
LMI is calculated based on the amount you are borrowing, the value of the property, whether you are a first home buyer, and other case by case factors. In is usually a sum into the thousands of dollars. For example, a first-home buyers purchasing a $700,000 property with a 10% deposit could expect to pay an additional $10,000-15,000* for LMI. This amount is typically added onto your total loan amount, meaning that the amount spent on LMI will also be subject to interest. Despite paying for this policy, it’s important for the purchaser to understand that they are not protected by it. In fact, the only beneficiary of LMI is the lender. In the event that you default on your payments, if the sale of the property does not cover the amount left owing, the insurance will protect the lender for their out-of-pocket loss.
LMI has caused some controversy, with lenders defending the expensive policies as necessary to provide an avenue for purchasers to get onto the property ladder sooner. Others have criticised LMI as “dead money”, costing a purchaser thousands of dollars plus interest for the life of the loan for the benefit of no-one except the lender. In addition, providing prospective homeowners a way to take out larger loans sooner also raises questions about the long-term impact and serviceability of these loans, as household debt continues to grow. With lenders beginning to introduce their own LMI products, there is some concern that these products are allegedly being pushed on prospective purchasers unnecessarily, as a means of generating easy income for the lender via additional interest payments over time.
Despite this controversy, the flip side for purchasers is the risk that if prices continue inflating as they have, what could have been a 20% deposit five years ago may soon be worth significantly less, leaving you priced out of Australia’s intensely competitive property market for a longer time while you continue to save. Although avoiding LMI is favourable where possible, it ultimately comes down to a question of weighing up the long-term cost of paying additional interest on a larger loan, against the possibility of being priced out of the housing market for a longer time. In some circumstances, LMI can be avoided in other ways, for example first-home owners government schemes that guarantee a percentage of the property price to allow purchasers to buy with a smaller deposit typically allow purchasers to avoid paying LMI. Alternatively, having someone who can act as a guarantor is another way LMI can sometimes be avoided while paying a smaller deposit.
A prospective purchaser would be best positioned to make sure they have a comprehensive understanding of their financial position and what is involved with taking out a loan. You may also wish to speak to a financial advisor or broker to determine whether paying for LMI as a means of purchasing a home sooner is a good option for you.
*This is an estimate only for illustrative purposes, applicable at the time of writing, and is not to be relied upon in any capacity as financial advice.
