about lenders MORTGAGE insurance
Before you read this post take a moment to learn about the new First Home Owners Deposit Scheme which can help first home owners save for a deposit possibly eliminating the need for them to take our Mortgage Lenders Insurance.
Today, most lenders offer home loans at ninety per cent or even up to ninety-five per cent of the total amount you are looking to borrow. This is called the LVR, or Loan to Value Ratio. The LVR also determines, in most cases, whether you have to pay Lender’s Mortgage Insurance (LMI). LMI protects the lender from a default on your part. It does not protect you in any way. So, the mortgage insurer is effectively taking on the risk for the lender.
As a rule, LMI is required when you don’t have enough deposit, typically less than twenty per cent. Along with your deposit, most lenders will also expect to see proof of consistent savings for a period of at least six months. If you are required to pay LMI, the mortgage insurer may impose similar conditions.
These conditions push a lot of borrowers, and particularly first home buyers, out of the market.
So, what can you do?
In certain circumstances, it is possible to purchase a block of land without the full twenty per cent deposit normally required. You’d need to research what individual developers are willing to negotiate. It may also be possible to find a willing developer who will leave half the deposit in the deal until such time as you pay off that amount. And make sure you’ve thoroughly researched your government grants and incentives. The First Home Owners Grant is in most states, only available to those who choose to build their own home or who buy a brand new, never previously occupied home and comes in handy when you are scraping together your deposit.
Weigh up the benefits of paying lenders mortgage insurance against continuing to pay rent. You may find that you're no worse off.
WAIT OR USE MORTGAGE LENDERS INSURANCE?
Here's an extract from a conversation I had with a first home owner where they asked a question about LMI.
First Home Owner:
This brings me to my next question which relates to LMI. I understand that this can be quite a significant amount when the deposit amount is low, but I wanted to get your view on paying LMI versus the additional time spent saving to avoid it whilst paying rent as well. For example, how could I best work through the pros and cons of…
Purchase within the next 6 months, take on the cost of LMI and stop paying $200 a week rent sooner that could go towards my own mortgage
Continue to build my deposit for another 12-18 months, pay no LMI once I take out a loan and continue to pay $200 a week rent through until the time where my deposit reaches a full 20%
This is a great question and it has often surprised me that people don’t want to pay LMI, yet are happy to pay rent for another 12 months while they save. Ideally we’d break down the sums, however we can’t do that without knowing how much you are borrowing and what deposit percentage you actually do have.
My suggestion would be first to decide what you are doing (building or buying as it will determine the type of loan etc) and find out how much you are able to borrow by talking to a construction loan specialist. But let’s do a hypothetical estimate for fun.
You have a budget of $400,000 but only have $40,000 for a deposit (10% only deposit or 90% Loan to Value Ratio). As a first home owner applying for a loan over 30 years you might pay around $7,000 in LMI. Paying $200 in rent for 12 months comes to $10,400. But weighing up the pros and cons might not be as simple as that and it's really important that you may a decision based on your own personal circumstances. Seek professional advice to help you decide if paying LMI is right for you.
Here's a link to some further info - www.moneysmart.gov.au/borrowing-and-credit/home-loans/fees
The end may justify the means as long as there is something that justifies the end
- Leon Trotsky
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