Insurance has its advantages
Many homebuyers decry the need to take out mortgage insurance, but the bigger picture of rising property prices reveals it can be a useful tool to enter the market
MORTGAGE insurance is often seen as “the great evil” by home hunters, desperate to avoid this additional cost when buying property.
Usually, if you have less than a 20 per cent deposit (through cash or other equity), your lender will ask you to insure them against your possible default.
So, if you’re buying a $500,000 home, for example, and have just $50,000 deposit, you may need to pay a Lenders Mortgage Insurance (LMI) premium of about $8800.
Notice the insured party is your bank, not you, with this policy designed to cover their backside if you default at any time during the term of the loan and the sold-up asset doesn’t cover the balance of your loan.
So, if you’re busily squirrelling away every penny and eating two-minute noodles from the room under your mum’s house, the simple question for home buyers is this: Should you wait to buy until you’ve saved that extra $50,000 (in the above example) or cop the bill for $8800?
The premium is a once-off for the life of that loan and, of course, once your equity tops 20 per cent (through either debt reduction or capital gain) you can shop for another loan without LMI.
REIQ’s research team confirms home prices are rising in many Queensland markets.
So LMI might not be the big bad enemy we all assume it to be.
Say, for our example, it takes you another 12 months to save that $50,000 deposit but prices rise by another 10 per cent in the meantime (Sydney is up 15 per cent this past year).
That same property would then cost you another $50,000 – and you’d need a further $10,000 in deposit.
If you think home prices are rising and you want to buy before you’ve saved the full 20 per cent deposit, you might feel this insurance is a cost worth having. Investors might also consider they can likely claim their LMI premium as a tax deduction.
Of course we do recommend home buyers do their homework and exercise caution in borrowing. Interest rates remain at generational lows but few commentators expect them to stay there.