First home buyers can benefit from lenders mortgage insurance
SAVING a deposit for a first home can take forever in a low interest rate environment, but one hack can get you into the market sooner and making money.
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FIRST home buyers are in the dark when it comes to lenders mortgage insurance (LMI), with research showing two in five do not know what it is, despite being more likely than ever to need it.
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Mortgage Choice and Core Data’s Evolving Great Australian Dream 2018 whitepaper revealed 42 per cent of more than 1000 respondents were not sure what LMI was, while 32 per cent said they would need it to buy property.
There was also confusion around who is actually protected by the insurance, according to Mortgage Choice chief executive officer Susan Mitchell.
“Only 32 per cent of prospective buyers accurately stated LMI is designed to protect the lender if a borrower can’t repay their mortgage, Ms Mitchell said. “Another 8 per cent thought LMI protected the borrower, while 18 per cent believed it protected both.”
Buyers aged 29 and under were least aware with 47 per cent in the dark, which Ms Mitchell said was concerning, as that was the demographic most likely to need it.
Lenders usually require a 20 per cent deposit to waive LMI, which provides a buffer should a borrower default on their mortgage. Lenders require LMI to cover that buffer when they approve a loan with a smaller deposit.
LMI can be handy when property values are rising, as an extra year in the market may mean equity gained more than covers the LMI cost.
But there are downsides, according to realestate.com.au hone loans spokesman Andrew Russell.
“The LMI fee is expensive and adds a significant cost to the loan … this can reduce the investment return for the borrower,” Mr Russell said. “LMI also restricts you being able to refinance as you will be required to pay the LMI fee again with the new lender if your loan to value ratio remains above 80 per cent.”
QBE and Genworth are the two main LMI providers in Australia. Genworth’s online calculator predicts a loan on a $550,000 property with a 10 per cent deposit of $55,000 will attract LMI of just over $9500. Unlike stamp duty, this can be rolled into a mortgage, so may mean approximately $50 extra a month in repayments.
Borrowers should always seek advice from a broker or their lender, before choosing LMI, advised a Genworth spokesperson.
“The cost of LMI varies depending on a number of factors including the amount of the loan, the level of your equity in the property, whether you are an investor or first homebuyer and the level of risk associated with the particular loan product or postcode (where) you are considering buying,” the spokesperson said. “Each case is different so consult with your home loan provider.”
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Gold Coast couple Lenka and Mira Mrkvicka did just that. They were renting when they stumbled upon their dream home, but aware they did not have enough for a deposit, sought advice from Mortgage Choice broker James Hasselle, who provided them with the leg work and support throughout and enabled them to get into the market.
Originally published as First home buyers can benefit from lenders mortgage insurance