How LMI can help you save money on a first home
For first home buyers, it can seem as though the goal posts are continually moving further away. You save hard to grow a deposit but rising home prices mean your deposit is never quite enough to get you over the line.
That’s where lenders mortgage insurance (LMI) can offer a valuable solution.
When housing values are appreciating faster than the cost of LMI, it can make financial sense to buy today and pay LMI, rather than holding out to save a bigger deposit only to end up paying more for a first home further down the track.
How LMI works
LMI is a type of insurance that applies if you have less than a 20% deposit. As a first home buyer, you don’t have to shop around for LMI, your lender will arrange it for you.
The catch is that LMI protects the lender – not you – if you can’t keep up the home loan repayments. So it’s often seen as a cost to avoid, especially as the one-off premium can be a major upfront expense.
How much will LMI cost?
As a guide to the cost, the website of LMI insurer Genworth features an online LMI estimator. It shows that a first home buyer who purchases a property worth $500,000 with a 10% deposit of $50,000 (and a home loan of $450,000) could face an LMI premium of about $8,6001.
That’s a decent chunk of money. To avoid LMI altogether, the first home buyer could save the extra $50,000 needed to have the full 20% deposit of $100,000. But this will take time. And if property values climb higher, it becomes even harder to pull together a 20% down payment.
In fact, if property values rise 10% over a 12-month period, that same $500,000 home may be worth $550,000 in a year’s time. At that point, a 20% deposit would be worth $110,000, so a first home buyer would need to save an extra $60,000 to pull together a 20% deposit. That’s a big ask over a 12-month timeframe.
By getting into the market now, rather than waiting an extra 12 months, the first home buyer may pay $8,600 in LMI but they will pay $500,000 for their home, rather than waiting a year (or more) and paying $550,000 – a difference of $50,000.
In this way, LMI can be a valuable tool that lets first home buyers beat rising property prices.
Saving a 20% deposit can be hard
If you’re struggling to save a deposit, you’re not alone. A report by Genworth found 76.9% of prospective first home buyers believe saving for a deposit is getting more difficult2.
In our most expensive city for property – Sydney, fewer than one in five first home buyers plan to get into the market with a 20% deposit3.
The same study showed four in five (82.7%) first home buyers who plan to buy with less than a 20% deposit are likely to use LMI.
Managing the cost of LMI
Of course, all this doesn’t get around the fact that LMI premiums can be very high. However, there can be a way to manage the cost.
Your lender may let you add the premium to your home loan in a process called ‘capitalising’ LMI. It lets you pay off the cost gradually as part of your regular loan repayments.
Your Mortgage Choice broker can explain how much LMI you could pay on your first home, and possible strategies to manage the cost.
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