Purchasing a property without a sufficient deposit can lead to costly Lenders Mortgage Insurance. However, it’s also possible that the time you’re taking to save up for the deposit will actually result in you spending more on your home.
Why is this?
When buying a home in Australia, buyers who wait until they have enough for the deposit (20%) can save money as they won’t be required to pay expensive Lenders Mortgage Insurance (LMI).
That said, purchasing a property with less than a 20% deposit and paying the required LMI is not necessarily a bad move. People who choose to do so may be able to acquire their dream house before prices hike. These individuals may also enjoy a capital gain when the value of their property rises. They may have to pay for LMI, but it could be worth it when you weigh up the financial pros and cons.
Before you make a decision, one of the best mortgage brokers in Charlestown (Newcastle) shares what you need to know about LMI:
What Exactly Is Lenders Mortgage Insurance?
If you’re borrowing more than 80% of the purchase price of a home, you’ll need to pay Lenders Mortgage Insurance (LMI).
LMI is a type of insurance that protects the lender against default of the loan. You – as the borrower – pay the insurance premium of LMI.
In Australia, mortgage default occurs when borrowers fail to pay the required repayments on their loan. A default can also occur when borrowers leave their mortgage without paying what they owe.
To cover this risk, some borrowers have to pay Lenders Mortgage Insurance.
Who has to pay LMI?
If you are buying a house, you will usually have to pay for LMI if you have less than 20% of the deposit.
There are currently some lenders (non-bank lenders) who are offering no LMI on a 15% deposit, however, they are the exception to the rule.
There are also other circumstances where you may be required to pay LMI if you are potentially considered as a high risk for not repaying your loan.
How Does LMI Work?
Companies that offer LMI will charge you a premium. They assess the risk of default on a property you want to buy and set the premium accordingly. You will get a certificate that shows the premium you paid.
If you have a deposit equal to at least 20% of the property’s ‘lender-assessed value’, you won’t have to pay any LMI. If you have less, you will have to pay.
If the home you want to buy is worth $500,000, the minimum deposit is 5% ($25,000). But if you have $100,000 or more as a deposit, you won’t have to pay LMI.
How Much Is LMI?
As mentioned above, the borrower pays for the insurance. The amount varies from lender to lender. Moreover, it depends on the purchase price of the home, the loan amount, and the deposit made by the borrower.
Lenders Mortgage Insurance is worth paying only in some cases.
With house prices skyrocketing across Australia, as a home buyer, you need to weigh up the pros and cons of paying LMI vs waiting to save a 20% deposit.
If you’re trying to save up for a deposit, you may be tempted to wait to purchase a property. It may be more cost-efficient to save the 20% deposit so you don’t have to pay the upfront LMI. Purchasing a property with a larger deposit is also safer for the borrower.
It’s important to note, however, that LMI isn’t necessarily more expensive than saving for a home deposit. Saving up for the deposit could entail costs of its own.
In some cases, it may take you a long time to save the ever-increasing 20% house deposit. If house prices are expected to rise by more than the cost of your LMI, it may be worth paying the LMI now and being able to enjoy life as a homeowner sooner.
A professional mortgage broker can give you straight-forward and sound advice about the pros and cons of LMI.
Speak to an experienced loan specialist in Charlestown today.
123 Financial group is the best mortgage broker in Charlestown and nearby areas.
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