When you consider that a small flat in Sydney could set you back half a million dollars at the moment, saving a 20% deposit to buy that flat – $100,000 (plus stamp duty!) – can seem an impossible task. That’s where LMI can help.
Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the purchase price as a deposit and an alternative where your parents cannot or do not want to be a guarantor.
What is it?
LMI protects the lender, should a home loan go into arrears, guaranteeing that the lender will get its money back if the property needs to be sold and there is a shortfall in repaying the loan. Just to repeat, this is insurance for the lender. It protects them in case you default on your mortgage and the property is repossessed. This is not insurance for the borrower. You are paying the premium to enable the lender to allow you to obtain a mortgage.
While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.
What’s in it for you?
For the borrower it may seem LMI it is just another bank fee. But LMI can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. In the example above, a $500,000 property, this brings the deposit down from $100,000 to just $25,000.
And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, it can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.
What you need to know
The insurance premium is generally a one-off payment, but you may be able to roll it into the loan amount so that you are paying for it month-by-month along with your mortgage.
There can be a big difference between premiums paid if you have, for example, a 10 per cent deposit saved compared with a five per cent deposit, so it may well be worth trying to gather together some extra funds, even if you are unable to reach the full 20 per cent.
Any questions? Let us help you. Call Chris today on 0490 075 039 or send an email to email@example.com