If your home deposit is too small…
FIRST home buyers are in the dark on lenders mortgage insurance (LMI), as research shows two in five do not know what it is, despite being more likely than ever to need it.
Mortgage Choice and Core Data’s Evolving Great Australian Dream 2018 whitepaper revealed 42 per cent of 1000 respondents weren’t sure what LMI was, but a third said they would need it to buy a home.
More confusion surrounded who was actually protected by LMI, said Mortgage Choice chief executive officer Susan Mitchell.
“Only 32 per cent accurately stated LMI is designed to protect the lender if a borrower can’t repay their mortgage,” Ms Mitchell said. “Another 8 per cent thought LMI protected the borrower, while 18 per cent believed it protected both.”
Buyers aged 29 and under (47 per cent) were least aware, which Ms Mitchell said was concerning, as that demographic was likely to need it.
Lenders usually require a 20 per cent deposit to waive LMI, which provides a buffer should a borrower default on their mortgage. Lenders require LMI to cover that buffer when they approve a loan with a smaller deposit.
LMI can be handy when property values are rising, as an extra year in the market may mean equity gained more than covers the LMI cost.
But realestate.com.au home loans spokesman Andrew Russell said there are downsides.
“The LMI fee is expensive and adds a significant cost to the loan … this can reduce the investment return for the borrower,” he said. “LMI also restricts you being able to refinance as you will be required to pay LMI again with the new lender if your loan to value ratio remains above 80 per cent.”
LMI provider Genworth’s online calculator predicts a loan on a $550,000 property with a 10 per cent deposit of $55,000 will attract LMI of just over $9500. This can be rolled into a mortgage, so may mean just $50 extra a month in repayments.
Borrowers should always seek advice before choosing LMI, advised a Genworth spokesperson.
“The cost of LMI varies depending on a number of factors, including the amount of the loan, the level of your equity in the property, whether you are an investor or first homebuyer and the level of risk associated with the particular loan product or postcode (where) you are considering buying,” the spokesperson said. “Each case is different so consult with your home loan provider.”