Recent results of a survey of 1,000 Australians has shown that nearly half of prospective home buyers did not know what Lender's Mortgage Insurance (LMI) was, despite knowing they were going to pay for it.
Even more alarming, nearly a quarter of prospective home buyers thought that LMI provided them with some sort of protection if they lose their job and cannot make mortgage repayments. So, let’s set the record straight, so you know how this works.
Traditionally a bank will require a 20% deposit on a home. If a borrower has less than 20%, LMI can be used to allow a borrower to purchase a property.
Taking a first home owner example, let’s say Jack and Emma want to stop paying rent and purchase their first home. To take advantage of the current First Home Owner concessions in WA, they will purchase for a maximum of $430,000.
At this purchase price, they will pay no stamp duty, which is a saving of $14,440. However, they will require a deposit of $86,000. Despite their good saving habits, which is seeing them save $15,000 per year, it will take nearly 6 years to save the required deposit! Rather than waiting for this time, they can elect to purchase with a lower savings deposit, say 5%
($21,500), and be able to get into their own home sooner.
So, in this case, LMI allows Jack and Emma to borrow enough to purchase a home sooner.
But who pays and are there any other benefits?
LMI is an insurance that protects the bank in the event of a default by the borrower, where the property is sold and proceeds of the sale are not enough to repay the loan. It does not protect the borrower if, for example, Jack or Emma lost their job and were unable to make the mortgage
repayments. LMI’s main benefit is allowing the likes of Jack and Emma to stop paying rent and purchase their own home sooner.
Whilst LMI covers the bank, the premium for this insurance is paid by the borrower, much like a house or car insurance policy premium. In many cases banks will allow the LMI premium to be added to the loan, so upfront fees can be minimised.
With medium house values in Australia of over $550,000, a 20% deposit of $110,000 plus stamp duty is even harder to save, so LMI is a great option to be able to purchase sooner. Whilst there are costs associated, they are relatively small when looked at over the life of the loan, not to mention Jack and Emma’s rent saving over the years.
LMI can also be used to purchase investment property, so investors who find quality residential property can get into the market and grow their wealth sooner.
Our Team regularly get questions on LMI, so will be well placed to answer all of your queries on this subject.
Additionally, if you wish to purchase a property but don’t quite have enough deposit, then talk to your Finance Manager to find out if LMI can help you.