When you consider that an inner Sydney apartment could set you back a million dollars, saving a 20% deposit to buy can seem an insurmountable task. That’s where insurance can help.
Lenders mortgage insurance (LMI) may be an added expense, but it offers buyers the opportunity to dive into the property market earlier, without saving up an entire 20 per cent of the property’s purchase price as a deposit.
What is it?
LMI protects the bank or lender should a 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 generally provides a good 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 the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five per cent deposit saved. For a million-dollar property, this brings the deposit down from $200,000 to $50,000.
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 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 can usually capitalise it into the loan amount so that you are paying for it month-by-month along with your mortgage.
There can be a big difference in premium amount paid. If for example you have a 10 per cent deposit compared with a five per cent the LMI premium will be much cheaper. It’s worth gathering all the extra funds you can muster, even if you despair of reaching the full 20 per cent.