AUSSIE DREAM

If you can’t quite get the 20 per cent deposit for a home loan, you might need insurance, Tim McIntyre writes

FOUR out of five first home buyers in 2017 were unable to stump up a 20 per cent deposit, research has revealed, meaning many were forced to rely on Lenders Mortgage Insurance (LMI) to purchase a property.

Mortgage Choice’s 2017 First Home Buyer Survey found that 81.8 per cent of young buyers had to borrow 80 per cent of the purchase price, meaning they would now be paying LMI.

While most borrowers try to avoid LMI, it can actually work in their favour in some cases.

Mortgage Choice broker Bob Korver believes LMI is a viable choice for buyers trying to get into a market where house prices are on the rise, because an extra year spent saving might mean they miss out on value growth that in one year may have exceeded the LMI they would have paid by getting in earlier. “Some buyers may choose to delay their property purchase in order to save a sufficient deposit and avoid LMI,” Mr Korver said. “Property prices are constantly rising and the longer you delay when you buy, the more likely you are to miss an opportunity to get on the ladder.

“Your time in the market is generally what reaps you the most rewards in the long term and the longer you are in the market, the more money your property will make.”

LMI is a minor expense when you focus on the big picture, Mr Korver said.

“The alternative to LMI Is the bank of mum and dad and having your parents go guarantor on the loan,” he said.

“However, this is not possible for everyone, in which case they are better off paying LMI.”

Smartline mortgage broker Aaron Sainsbury said most of his clients preferred to explore alternatives to LMI, such as parental guarantees.

“When there are alternatives to paying LMI premiums, clients will always be willing to explore them as it can be a substantial expense,” Mr Sainsbury said.

“That said, there are cases when it is useful and can be considered an opportunity cost. Certainly, for first home buyers, the cost of missing out on a rising market would sometimes exceed the cost of an LMI premium.”

Brett Clifton and Sussi Bergenstrahle-Fotivec were required to take out LMI on two loans over the past two years for property purchased on the Gold Coast.

They were reluctant at the time, but understood it was a necessary vehicle to secure the purchases.

“I recognised that we would need to pay some LMI because we weren’t going to come up with a 20 per cent deposit, but we were anticipating it would be a lot less than what it was because the valuation in both cases came in at less than the purchase price,” Mr Clifton said.

“We know that the other homes for sale in that area and that have been sold since then, have sold for more than what the bank valued our place at. The valuation played very heavily into the amount of LMI we had to pay and it was a lot steeper because the valuation came in fairly conservatively ... We paid about $45,000 LMI which is a lot.

“I turn 55 this year so I didn’t have more time to wait and in the meantime we are paying $1000 a fortnight in rent. If we left it, we might not have saved up the money and the market would have moved away.”