September 02, 2014
Are you in the market for a property but don’t have a huge amount of money plugged away in savings?
If the answer is yes, don’t fret – you are not alone.
Many potential borrowers don’t have a significant deposit when they start looking for a property.
In fact, according to Mortgage Choice’s 2014 First Home Owner Survey, almost 75 per cent of first time buyers were forced to borrow more than 80 per cent of the value of their new property from a lender – meaning they had a deposit of less than 20 per cent.
But, that didn’t stop them from jumping on the property ladder. Instead, these home buyers paid Lenders’ Mortgage Insurance to make their property ownership dreams a reality sooner rather than later.
Lenders’ Mortgage Insurance is a premium that borrowers are required to pay when they buy their home if they do not have a down payment of at least 20 per cent of the value of the property.
Generally speaking, Australia’s lenders like borrowers to have a deposit of at least 20 per cent of the value of the property they wish to purchase before they lend money to them.
Unfortunately, with property prices constantly on the rise, saving a 20 per cent deposit can be incredibly difficult, and in some instances, completely unachievable.
Thankfully, with Lenders’ Mortgage Insurance, you don’t have to a 20 per cent deposit at the ready in order to seek finance for a particular property.
Lenders’ Mortgage Insurance ultimately helps lenders broaden the net of who they are able to lend to by taking some of the risk out of lending the money. It means that more people are likely to get a loan and the home they want sooner.
Who does it protect?
But while Lenders’ Mortgage Insurance can stop you from having to save a 20 per cent deposit and ultimately help you onto the property ladder sooner, it is important to note that this particular insurance does not protect you (the borrower) in any way.
At its core, Lenders’ Mortgage Insurance protects your lender in the unfortunate event you default on your home loan.
When lenders agree to lend customers money, there is a small risk that they won't get the money back if you are not able to meet the repayments. Although they have the house as security, if property values decline that security may not be enough to cover the outstanding loan when the lender comes to sell it.
This is where Lenders’ Mortgage Insurance comes in. It takes the risk out of lending so Australia’s lenders can happily and safely lend you more than 80 per cent of the value of the property you wish to purchase.
How much does it cost?
Lenders’ Mortgage Insurance is usually a once only premium that is payable at loan settlement. That said, most lenders allow the premium to be capitalised into your loan. This helps you to avoid having an upfront payment and spreads the cost of the insurance over the loan as a whole.
The actual cost of Lenders’ Mortgage Insurance will vary depending on how much money you borrow and the size of your deposit.
For example: If you buy a property for $500,000 and you borrow $450,000, you will pay approximately $7,920 in Lenders’ Mortgage Insurance.
Similarly, if you buy a property for $1million and you borrow $900,000, your Lenders’ Mortgage Insurance premium will be approximately $20,070.
Note: these LMI calculations are for first home buyers only.
If you would like more information about Lenders’ Mortgage Insurance or would like to know what your premium will be, call me on 5502 8906 or click on the contact us tab at the top of the page.