Saving a 20 per cent deposit to buy your first home can seem an unbelievable task.
Lenders mortgage insurance is one way to buy a property without having the 20 per cent deposit which is typically required by most lenders.
LMI may be an added expense. However, it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.
What is LMI? LMI protects the bank or lender, should a home loan go into default, 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.
While a 20 per cent 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.
For the borrower, it may seem LMI, is just another expense to cover.
But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. For 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.
Lenders mortgage insurance is one way to buy a property without having the 20 per cent deposit.
In the time it takes to save a higher deposit amount, property prices may well have increased 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 all the rent that you would pay while you are saving. The insurance premium is generally a one-off payment. And in the majority of cases you are able to roll it into the loan amount so that you are paying for it month-by-month along with your mortgage.
Investigating your options and working out whether to buy now or save extra is a decision a good finance broker can help you with.
Olympia Andronicos is a credit representative (507463) of BLSSA Pty Ltd ACN 117 651 760 (Australian Credit Licence 391237).