When you consider that a small apartment in Perth could set you back $500,000 at the moment, saving a 20% deposit to buy that apartment – $100,000 – can seem an insurmountable task. That’s where Lenders Mortgage Insurance can help.
Lenders Mortgage Insurance (LMI) may be an added expense, but it offers you the opportunity to dive into the property market earlier, without saving up an entire 20% of the property’s purchase price as a deposit.
What is Lenders Mortgage Insurance?
LMI protects the bank or lender (not you!), should your 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% deposit provides a solid 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 you, it may seem LMI is just another expense to cover. But insurance can mean that you will be able to enter the property market with, for example, only a 5% 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 the 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 (capitalise) 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 despair of reaching the full 20 per cent.