One of the biggest hurdles homebuyers face, irrespective of whether it’s their first, second or even their forever home, is being able to put down the deposit.
Most lenders require a 20 per cent deposit, which helps insulate them in the event that house prices fall or the borrower gets themselves into financial trouble – leading to a default.
However, as house prices have risen steadily over the past decade, being able to save a 20 per cent deposit has become quite challenging. As a result, many homebuyers are looking at ways they can get into a home with a lower deposit. That’s where lenders mortgage insurance can be a real benefit to home buyers.
Lenders Mortgage Insurance or LMI is a one-off insurance premium, paid by the borrower, that protects the lender in the event the homebuyer defaults on their loan.
Generally speaking, if a borrower can’t come up with a 20 per cent deposit, LMI could be applicable if you want to take out a loan. In practice, a 20 per cent deposit equates to a loan-to-value ratio of 80%.
Each lender will have different policies and loan products available based on a borrowers personal circumstances. Paying LMI makes it possible to get a loan with an LVR such as 90% or even 95%.
The price of lenders mortgage insurance varies based on the overall value of the loan and also the LVR.
As a rule, a $500,000 loan could see your LMI premium sit around $10,000, however, that could be more or less depending on how much deposit you are able to contribute. For example, there is a significant difference between a loan with an LVR or 85% and 95%. But in this case, both will require LMI to be paid.
Usually, LMI is an upfront payment, however, some lenders might allow you to add this to the value of the loan. Interest will likely be applicable in this case.
It’s also worth considering that unless you meet certain criteria (such as being a first home buyer) you will also need to pay stamp duty on the purchase of the property. The rate of stamp duty varies between states and averages around the 4-5% range. In combination with LMI and a deposit, there is still a significant cash contribution required.
Buying a home and paying LMI is all about opportunity cost. While LMI is an upfront expense that will still need to be paid, it also helps you get into a home faster.
Being in the property market allows you to make the most of any capital growth or it could save you from missing out and paying more for a property if prices are already rising. IF you don’t currently own a home, purchasing sooner would mean you don’t need to pay rent, in the example of a first home buyer.
If you’re looking at buying a home for $500,000 and needing to save $100,000, that could be a significant hurdle for a lot of people. With LMI, you could cut that in half which would accelerate your property journey.
The same will be true for investors who are looking to capitalise on capital growth from properties they already own. With just 10% capital growth in a property they already own, an investor would have the option to purchase another property and continue to expand their property portfolio – assuming they have sufficient borrowing capacity.
This can really help an investor who is in the accumulation phase and trying to grow their property portfolio.
LMI is a great tool to help get into a home faster, however, given the costs involved, more lenders are starting to incorporate this into their offerings.
A new loan product from St George allows first home buyers to access an 85% LVR with LMI only costing $1. This offer is available for principal and interest loans up to $850,000.
When used in conjunction with a range of other offerings for first home buyers, such as the first home owners grant and stamp duty exemptions, this is an example of how you can get into a home faster, by using a tool like LMI.
Lender’s Mortage Insurance is a great tool that allows you to get into a home or purchase an investment property faster than you might otherwise be able to. While there is a significant cost involved, the benefits might outweigh the initial expense.
● LMI is generally payable on loans with an LVR of 80% or more.
● LMI is in place to protect the lender in the event of a default by the borrower.
● This will normally be an upfront payment in excess of $10,000, but can at times be included in the total loan.
If you need to speak to an expert to see if you are eligible for a home loan with mortgage insurance you can speak to us by completing a Free Assessment Form and get started on your property purchase journey today.