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Large proportion of buyers don’t understand LMI

About two in five potential home buyers don’t understand what lenders’ mortgage insurance (LMI) is, according to new research by Mortgage Choice.

This is despite nearly one-third of research respondents admitting that they would need to pay the insurance premium to get into the property market.

LMI is usually a one-off premium that protects a lender from financial loss in case the borrower can’t meet their home loan repayments after foreclosure.

LMI is generally compulsory for borrowers who can’t afford a 20 per cent deposit on their home loan.

While LMI can offer a way for borrowers to get into the market sooner, the research shows that an alarming amount of would-be buyers don’t understand it.

Results from the research show that 32.1 per cent of prospective buyers accurately stated that LMI is designed to protect the lender but 17.6 per cent mistakenly though it protected both the borrower and the lender, while another 8.2% thought it protected the borrower.

Mortgage Choice CEO Susan Mitchell said that LMI is likely to be a cost that many first home buyers have to pay to get into the property market.

“The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years,” she said.

She went on to state that the median dwelling value in Australia is $554,605 (according to CoreLogic). This means that for a first home buyer to avoid LMI, they would need to save $110,921 for a 20 per cent deposit alongside additional funds needed to cover costs such as legal fees and stamp duty.

This is a large amount for most first time buyers, and it can be much higher for those trying to buy in Sydney and Melbourne.

Should you use LMI?

It may seem wise to try and avoid paying LMI, however it might not be as bad as it sounds.

“A buyer can choose to delay their property purchase to save a sufficient deposit, but the reality is property prices have risen consistently and the longer they delay, the more likely they are to miss an opportunity,” Mitchell said.

“Ultimately, in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.”

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