While lenders mortgage insurance – also known as LMI – has long received a bad wrap from first home buyers, what if you could leverage it to your advantage?
Although many first home buyers may feel a glimmer of hope at the prospect of Labor being back in power, it doesn’t look like there will be any sweeping reforms to housing just yet. As such, many are turning their attention back towards the uphill battle of saving up enough funds to foot the bill for a house deposit.
As most already know, the consequences of not having the full 20% deposit for a mortgage is being hit with lenders mortgage insurance. Otherwise known as LMI, this is a long standing policy enforced by banks to protect themselves in the event that a home loan isn’t repaid or a lendee defaults.
Often painted in a negative light and something that most first home buyers should actively avoid, does paying LMI always spell bad news for first home buyers, or is there a way to use it to your advantage instead?
The Pros And Cons Of LMI For First Home Buyers
First introduced in Australia in 1965, Lenders Mortgage Insurance – or otherwise known as LMI – was designed to encourage more Australians to enter the housing market, while still allowing the lender to protect themselves in the event that a client defaulted on their home loan.
Typically, LMI is compulsory for all mortgage applicants if they don’t have a 20% deposit saved up to buy a house. Given that the median house price for Brisbane is now roughly $850, 000, without the option of Lenders Mortgage Insurance, buyers would be expected to save a whopping $170, 000 at the very least to purchase a property.
This figure is simply unobtainable for many, especially first home owners looking to get their foot on the property ladder. The cost of living certainly isn’t getting any easier, so if your options are spending a decade or more saving for a house deposit or simply opting to pay LMI, the latter is a trend on the rise.
Calculated on a sliding scale, an example of LMI at work is that if you were looking at a property at $500, 000 with a 10% deposit ($50, 000) – expect your LMI bill to be around $8, 000. While it sounds like a lot and is usually the first of many home loan fees that have a tendency to fill first home buyers with dread, LMI can also enable access to a mortgage with as little as 5% to get into the market faster, and simply gets added to the balance of your mortgage.
According to Madd Loans founder George Samios, skyrocketing house prices means that paying Lenders Mortgage Insurance doesn’t have the same stigma as it once did.
“While nobody likes paying any more on bills than they absolutely have to, paying LMI doesn’t have to be a bad thing. The golden rule to remember with all things property related is that repaying a home loan that includes LMI will still put you ahead in ten years time when compared to the prospect of paying rent. If $5, 000 worth of LMI is all that stands between you and a home loan, it’s a no brainer when compared to forking out $15, 000 just a year’s worth of rent.”
However, it’s worth keeping in mind that there are more options available to first home buyers who would prefer not to pay Lenders Mortgage Insurance. If your circumstances allow it, consider the path of a guarantor home loan. Although the exact terms and conditions vary between lenders, some require the buyers using guarantor home loans to have a minimum 5% deposit, while others will allow the buyer to borrow up to 105% of the purchase price of the property.
In addition, be sure to double check if you qualify for any existing government grants or funding as a first home buyer. Although these may change in line with the new government, options currently include the First Home Loan Deposit Scheme, the Family Home Guarantee, or the First Home Super Saver Scheme. These federal schemes have all been introduced to make purchasing your first home easier, so it’s worth exploring these options if you meet the eligibility criteria.
For first home buyers not quite ready to purchase property in the immediate future, it’s also worth considering newer schemes that are set to be unveiled in full over the next few months. For those in favour of a treechange, keep an eye on updates for Labor’s new Regional First Home Buyer Support Scheme commencing in January 2023, or even the proposed shared equity ‘Help To Buy’ scheme.
If you’re struggling to make a game plan on how to make your foray into home ownership, then the good news is that there’s always help available for those who know where to find it. To avoid making big financial decisions based on guesswork, it’s always worth getting in touch with the professionals.
Partnering With Home Loan Professionals
Navigating the complex world of home loans has long been regarded as stressful, frustrating and time consuming – but if you can find the right advice on sourcing how mortgages work, then the good news is that it doesn’t have to be.
Since their inception in 2012, the team at Madd Loans have worked tirelessly in providing over 2,000 Queenslanders with finance options to help turn their dreams into reality. With the entire brand being built on referrals, owner George Samios takes great pride in making the loan process both fun, educational and stress free – and he has a swag of awards to prove it.
If thinking about your financial future strikes a chord with you, then it might be time to speak to a professional. Whether you’re chasing mortgage solutions or a financial fairy godmother, the team at Madd work together as a collective to turn your goals into reality.