Use mortgage insurance to get foot in the door

NO LEEWAY: Courtney Bowie is one of a growing number of small business owners who have had their loan applications rejected due to tighter lending laws. LENDERS mortgage insurance (LMI) is a dirty term in the minds of many would-be home buyers in Australia, but research shows it can actually be used to a borrower’s advantage.

Canstar’s 2017 First Home Buyer Award research found that while LMI is seen by many young borrowers as more dead money paid for the benefit of a bank, paying it can be worthwhile in a property market where values are rising.

Most buyers aim for a 20 per cent deposit to avoid paying LMI, which averages between $8000 and $9000 for a $500,000 property with a 10 per cent deposit, according to insurer Genworth.

LMI only serves to protect the lender in case that buyer defaults on their mortgage, but paying the money and bypassing what could be years of saving in a low interest rate environment is a better option for some, according to Canstar finance expert Steve Mickenbecker.

“Being able to save a 20 per cent deposit is a daunting task, particularly if you look at the high property prices in most of Australia’s capital cities,” Mr Mickenbecker said.

“By paying LMI, first-time buyers can get into the property market with a smaller deposit. Buyers can even add the cost of LMI to their loan, meaning they don’t have to fork up the money up front.”

Sydney’s current property boom has seen values grow by more than 10 per cent a year, according to Corelogic data.

By using a 10 per cent deposit to buy in one of the past four years, a borrower would have made their LMI payment back, plus extra equity after one year.

Perth’s falling market is the counterexample. Taking extra time to save 20 per cent may have resulted in a buyer paying less for a property than a year earlier.

Canstar calculations show LMI is beneficial if values grow by 6.66 per cent a year, but not if they grow by less than 3.78 per cent.

“Look at the market forces driving values up or down and your own ability to save more funds,” Mr Mickenbecker said. “There are other considerations too, such as being able to purchase the property of your choice at the time, and if you do decide to save for longer you will need to factor in rent and any increases to stamp duty, among other things.”

Mortgage Choice CEO John Flavell said he has seen customers wait to save a 20 per cent deposit, only to watch prices rise faster than they can save.

“Home buyers should see LMI as something that can help, not hinder them,” Mr Flavell said.