Lenders mort­gage in­surance lurks

Western Suburbs Weekly - - Business - Troy Macmil­lan on De­sign­ing Wealth

Q: I am sav­ing to buy my first home and heard the Gov­ern­ment has in­creased the First Home Own­ers Grant by $5000, but only for this year. Should I buy be­fore De­cem­ber 31? An­thony, Su­bi­aco

A: While it’s true that the WA Gov­ern­ment has in­creased the amount of the First Home Own­ers Grant from $10,000 to $15,000 for the 2017 cal­en­dar year, you still need to con­sider your cir­cum­stances be­fore rush­ing to buy.

The over­all amount you have saved will de­ter­mine whether it is worth pur­chas­ing in 2017.

While lenders will loan up to 95 per cent of a prop­erty’s value, if you need to bor­row more than 80 per cent of the value, you will need to pay lenders mort­gage in­surance (LMI), which is ba­si­cally an in­surance to cover the lender if you de­fault on the loan.

They get the in­surance but you pay the pre­mium!

For ex­am­ple, if you want to buy an $800,000 prop­erty but only have a de­posit of $140,000 saved (which is un­der the 20 per cent min­i­mum of $160,000) you would face a LMI pre­mium of $6864.

So you would ac­tu­ally be bet­ter off wait­ing un­til next year, sav­ing an­other $10,000 to get to $150,000 and then get the $10,000 grant, which will be back in ef­fect in 2018.

That way you avoid the LMI and save your­self $1864.

Other fac­tors, like po­ten­tial prop­erty price in­creases, need to be taken into ac­count, but this ex­am­ple shows you need to con­sider very care­fully be­fore mak­ing pos­si­bly the big­gest in­vest­ment of your life.

Troy.macmil­lan@twd.com.au

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