Want to get into the property market but struggling to save for that 20 per cent deposit you need? Then LMI, or Lender’s Mortgage Insurance, is likely on your radar.
What is LMI?
Essentially, LMI is insurance paid by a borrower to protect their lender. It covers a lender in case the borrower can’t make repayments and the sale of a home doesn’t cover the outstanding balance of the loan and any costs.
LMI can be useful for borrowers as it means that lenders will be more likely to consider their application if they haven’t got a full 20 per cent deposit saved. In fact, some lenders may allow a deposit of just 5 per cent.
Should you try to avoid paying LMI?
Taking out LMI can be expensive, and will be more costly the more you need to borrow.
Obviously, nobody wants to pay more than they need to, and by avoiding paying LMI you will have one less cost to worry about when purchasing a home.
However, you need to ask yourself what you might be missing out on by waiting to get into the market.
What will property prices do while you’re waiting to save?
The real question you should consider is how much property prices are set to go up in the time it would take you to save for a 20 per cent deposit.
In Sydney for example, there have been predictions that property prices could go up in the next year by at least 5 per cent. So if you purchase a $500,000 property today it could be worth $525,000 in just one year’s time.
If you need to take out LMI with as little as a 5 per cent deposit ($25,000) on a loan of $475,000 then you could be looking at paying a LMI Premium of roughly $15,000.
Alternatively, you could wait until you could afford to pay the full 20 per cent deposit of $100,000 on the same $500,000 property.
If you think it might take you 3 years to save then keep in mind that the property will go up in price too.
What is now worth $500,000 could be worth close to $580,000 if it goes up 5 per cent each year over 3 years. This means that not only will you be paying a higher deposit in a few years time but you will also be missing out on a potential price increase of $80,000 to avoid paying that $15,000 fee.
Assess your own situation
Of course, if the property market you plan to buy in doesn’t move (or goes down!) in the next few years then you will probably be better off waiting until you have a full 20 per cent deposit saved and can avoid LMI.
Every buyer’s situation is different and to work out what is best you will need to take a long look at your own savings capabilities and compare this to price projections where you intend to buy.
Even if it does work out better to buy with a smaller deposit though, you may not want the burden of the extra financial risk, which can be very stressful.
If you’re unsure what is best for your circumstances seek out professional financial advice and remember to always keep saving so that LMI or not you are a little bit closer to buying a home.