Has buying your own home been on the top of your wishlist since long? With interest rates at an all time low (and further cuts expected), time is ripe to dive into the property market. But interest rates are not what’s deterring first home buyers from entering the market.
According to Genworth, Australia’s largest lenders mortgage insurer, saving the requisite deposit is the key barrier keeping away hopeful buyers from buying their first property. In the company’s recent home buyer confidence index, a quarter of the participants suggested the deposit to be the biggest barrier to purchasing property.
As the property market blows the trumpet for the golden 20% deposit, borrowers remain unaware about that they can opt for low doc loans (up to 95% of the property’s price) which means while a borrower ends up paying few thousands as lenders mortgage insurance, they do not need to save more than 5% of the property value to hop on the property bandwagon… And considering how property prices are soaring every year, buying now may help save much more than what you spend on LMI.
What is LMI?
Lenders Mortgage Insurance or LMI is an insurance that protects the lender in case a borrower fails to make repayments (Calculate your repayments before you subscribe for a loan). Borrowers are required to take LMI in case they want a home loan for more than 80% of the property’s market value as high loan to value ratio (LVR) loans pose higher risk to lenders.
Keep in mind that LMI only protects lenders against financial loss and not borrowers.
LMI lets you borrow up to 95% of the property’s cost and protects the lenders in case you are not able to afford the repayments in the future. On sale, if the proceeds of the house are not enough to cover the outstanding loan, the lender can claim the shortfall from LMI provider.
How is LMI premium calculated?
LMI premium is calculated as a percentage of the amount you borrow. It is calculated on a tiered basis, according to the amount of the loan, and several factors such as the amount of deposit and your employment status affect the amount of the premium.
Ashley wants to buy a home worth $400,000. She has a steady job and earns decently well to afford repayments on her home loan. However, she doesn’t have a 20% deposit but only $40,000 to pay upfront. While everyone advises her to save more, she approaches a mortgage broker who advises her to go for a low deposit loan (90% of the property price) and pay a modest LMI premium. What’s more, Ashley adds up the LMI amount to her home loan and now proudly owns a savvy unit in Melbourne.
On the other hand, had Ashley waited for 2-3 years to save up the deposit of $80,000, chances are property prices may increase and $80,000 may no longer be enough for a 20% deposit. LMI enables Ashley to buy the home early and build in equity in her home by using her money to make repayments instead of paying monthly rent. In the next 3 years, she can buy another property using equity in the home..
How to avoid paying LMI
While it is true that LMI increases the total cost of the home, the amount of LMI can be added to the total amount of the loan, meaning no upfront payment needs to be made. However, you can avoid paying LMI by following these handy tips:
1. Have a bigger deposit– Having a bigger deposit means you don’t have to pay any LMI. Keep your LVR below 80% by saving up to 20% of the property price as deposit. Making a good household budget using this calculator will help you achieve fatter savings quickly.
2. Get a family guarantee– A family member can guarantee your loan by pledging a part of their property to secure your home loan. However, be sure that you can afford the repayments in the future as your parent’s home may be at risk.
3. Check LMI premium for different tiers– LMI premium depends on the amount of the loan. It is calculated on a tiered basis and usually the premium on a loan of $300,000 is much lesser in comparison to a larger amount. It may be worthwhile to confirm with your broker or lender if you are near to a less expensive tier and save up a little more to save a lot on the premium.
4. Consult an expert– Using a mortgage broker can help you save precious bucks. A broker will help assess your financial situation and recommend a loan that suits your financial condition. Whether to go for a low deposit loan or not is a choice that totally depends on your financial goals. Paying LMI is not always bad and a broker can help you decide the best option for you.
By Vidhu Bajaj