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

The Courier-Mail - Property - - REALESTATE MARKET OUTLOOK -

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.

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