Pitfall alert on mortgage

ONE in five home buyers are paying for expensive lenders mortgage insurance just to get their foot in the door of Australia’s sizzling property market.

Many spend tens of thousands of dollars on LMI that’s required by their bank, without understanding its rules or realising there can be cheaper alternatives.

A new analysis of 70,000 borrowers by home loans giant Aussie has found 19 per cent had used LMI in the past year.

The insurance protects the bank – not the borrower – if the borrower goes bust, and it is usually payable upfront by those who cannot afford a 20 per cent deposit.

Costs vary depending on loan size and deposit size, but for a $500,000 home with a 10 per cent deposit LMI costs almost $10,000, while an $800,000 property purchase with a 5 per cent deposit result in a $35,000plus LMI hit.

Aussie CEO of distribution Brad Cramb said soaring property prices were prompting some buyers to choose to pay the insurance rather than build a bigger deposit.

“Some borrowers believe that it is in their interest to grow their equity by jumping on the property ladder and paying LMI now, rather than waiting and risking being completely priced out of the market if prices continue to go up,” he said.

Separate research by Digital Finance Analytics found the number of new LMI policies in Australia jumped 25 per cent in 2020 to 273,000, and another 150,000 policies started in the first six months of 2021.

Digital Finance Analytics principal Martin North said about 20-25 per cent of homebuyers had LMI included in their loans.

“People get worried about missing out so they just want to pay something (to secure a home loan),” he said.

“People are also using the bank of mum and dad to take them below the 80 per cent.

“A lot of people assume they’re protected but they’re not – it’s protecting the lender. You are paying a premium to protect the bank.”

This meant a LMI insurer could still come after the borrower to recoup its losses, Mr North said.

Mr Cramb said LMI was just one way “to get your foot on the ladder” and urged people to understand what other assistance was available.

One example is the government’s First Home Loan Deposit Scheme, which guarantees up to 15 per cent of a property’s value so the borrower only needs to stump up 5 per cent. However, it comes with income thresholds, price limits and other conditions.