As a first home buyer on the Gold Coast, you may have heard that you need to save a 20% deposit before you can apply for a home loan. Otherwise, you’ll have to pay…Lenders Mortgage Insurance! And let’s face it, none of us like having to pay extra for stuff. But on the flip side, how long will it take you to save that 20% deposit? And do you really want to continue living in a share house/old rental/your parents’ spare room for that long?
According to data from the Reserve Bank of Australia, around 25% of home loans have Lenders Mortgage Insurance. Despite this, over half of all surveyed millennials have never heard of it, and close to 70% of Aussie households think they’re covered by it (which is clearly not the case…).
So, what exactly is Lenders Mortgage Insurance? Is it something to be feared and avoided at all costs? Or could it help you buy your first home a lot sooner?
Understanding Lenders Mortgage Insurance
Often referred to by the acronym LMI, Lenders Mortgage Insurance is an insurance policy that is paid for by the borrower. It’s designed to protect the lender in case the borrower defaults on their mortgage repayments. Yes, you read that right: It protects the lender, not the borrower (something which comes as a shock to many, who may be confusing LMI with ‘mortgage protection insurance’).
Why Does the Lender Need Protection?
Lenders are all about assessing risk. Anything too high risk makes them (understandably) very uncomfortable. If a borrower has a 20% deposit, it means the lender is only risking 80% of the property value (known as the Loan-to-Value Ratio, or LVR). If the borrower defaults on their loan, the lender should easily be able to sell the property to recoup their full costs.
But if the borrower only has a 10% deposit, then the LVR is 90% – a much higher risk proposition for a lender. If property prices decline and the lender can’t sell the property for at least 90% of the original purchase price, they’ll lose money. To prevent that from happening, most lenders will require borrowers with a deposit of less than 20% to pay for an LMI policy.
How Much Will LMI Cost for First Home Buyers on the Gold Coast?
The premium for your LMI policy will depend on a range of factors, including the estimated property value and how much of a deposit you have saved. First home buyers, in general, are viewed as higher-risk borrowers than existing homeowners, so they’ll usually be charged a higher premium. If you’d like a more detailed assessment of how much you’d be charged for Lenders Mortgage Insurance, then feel free to give me a call.
Is Lenders Mortgage Insurance Worth It?
The answer to this question will depend very much on your personal circumstances. If you’re not far off having a 20% deposit, it could be worth waiting just a little bit longer to avoid it. However, if it’s going to take you years of savings to reach that 20% (during which time property prices on the Gold Coast could continue to skyrocket), then it could very well be worth paying LMI so you can buy now.
The best thing to do is talk to an experienced mortgage broker on the Gold Coast. I can review your current situation, answer all your questions and then provide tailored advice for your specific situation. I can also let you know if there are any other options available to you, such as the First Home Loan Deposit Scheme or having someone act as a guarantor on your home loan.
To find out more, get in contact via Ph: 0421 934 033 or Ph: 07 5597 6049.