Despite dire predictions a year ago, the property market just keeps steaming ahead. And while there’s never a guarantee that values will keep increasing, most of us would prefer to be on this train than standing on the platform as it races past.
Even though interest rates have never been lower, the past few years have seen property prices increase so quickly that many would-be owners have been left feeling deserted … watching the property train disappear into the distance.
When you consider that the average price for a unit in Sydney is more than $750,000, the idea of saving a 20% deposit – $150,000 – can seem an insurmountable task. That’s where insurance can help.
Lenders mortgage insurance
Lenders mortgage insurance (LMI) protects your bank or lender if you are unable to meet the repayment requirements of your loan. The financial institution takes out the insurance to cover themselves for the risk of lending to you. They then pass the cost of that insurance on to you.
Depending on your employment status, credit history, current savings and any other assets, lenders will reduce the deposit requirement below 20%. This doesn’t automatically mean you can just wander in with a 5% deposit in your pocket, but it can significantly reduce the up-front burden of breaking into the property market.
Advantages of LMI
In a market that’s running hot, every month on the sidelines equals missed capital growth. Breaking into the property market for the first time is the biggest hurdle most homeowners face, and LMI might end up cheaper in the long run that spending another year (or more) saving for that deposit.
If you’re able to purchase a property, then scrimp, save and sacrifice to meet the repayments, you’re possibly going to better off financially in the longer term. It can make good financial sense to purchase earlier even with the added cost of LMI, especially when you consider the rent that you would pay while you’re saving.
Things to know
Of course, LMI costs money. Some lenders require the insurance payment up-front, while others may let you add it to the total cost of purchase. If you can negotiate the latter, it means you’re paying LMI off a bit at a time, leaving more of your savings for the actual deposit.
The LMI premium itself will be based on the size of your deposit, so it’s still vital to save as much as you possibly can in advance, even if 20% seems like an impossible target.
First Home Loan Deposit Scheme
Eligible first home buyers my be able to enter the market with a 5% deposit without the need to pay costly lenders’ mortgage insurance under a Federal Government scheme introduced to assist first home buyers purchase their first home with a lower entry cost. Under the initiative, the National Housing Finance and Investment Corporation (NHFIC) guarantees to a participating lender up to 15% of the value of the property as long as that is financed by an eligible first home buyer’s home loan.
Talk to us
The brokers at Mortgage Broker Group are experts on the home-loan and credit markets. Investigating your options and working out whether to buy now or save extra deposit is a decision that our brokers can help you with.
Contact us today and we can assess your financial situation and let you know whether lenders mortgage insurance can help you get on the property ladder faster.