While a 20% deposit generally provides a good buffer against any drops in property value over the life of a loan, LMI can also provide the same protection, meaning borrowers can purchase property with a smaller deposit.
For the borrower, it may seem LMI is just another expense to cover. But insurance can mean that some buyers will be able to enter the property market with, for example, only a five percent deposit saved. In the example above, a $500,000 property, this brings the deposit down from $100,000 to just $25,000. And, if the market is hot and prices are rising rapidly, paying LMI so that you can buy now could be cheaper than taking the time to save a bigger deposit. In the time it takes to save a higher deposit amount, property prices may well have surged by more than cost of the insurance so, for some properties and purchasers, 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.
The insurance premium is generally a one-off payment, but you may be able to roll it into the loan amount so that you are paying for it month-by-month along with your mortgage. There can be a big difference between premiums paid if you have, for example, a 10 percent deposit saved compared with a five percent deposit, so it may well be worth trying to gather together some extra funds, even if you despair of reaching the full 20 percent.
An MFAA-accredited Finance Broker is an expert on the industry and the credit market. Investigating your options and working out whether to buy now or save extra deposit is a decision that a good Finance Broker can help you with.
Source: The Mortgage and Finance Association of Australia (MFAA)