Most people’s dream is to one day have a home of their very own. Their own “Castle” so to speak. However, becoming a home-owner has become increasingly difficult over the years, particularly with the price of property increasing and lenders regularly changing their policies. The biggest hurdle for most people looking to enter the property market is saving enough funds to use as a deposit, whilst continuing to meet their regularly commitments (often including rent). With most lenders requiring a minimum 20% deposit to avoid Lenders Mortgage Insurance (LMI), the reality is that LMI is going to be a fact of life for many as it isn’t easy to save that $80,000 required to purchase a $400,000 property.
For those that can’t save the 20% deposit and wish to own their own home sooner with a smaller deposit, Lenders Mortgage Insurance (LMI) is going to be payable. In most cases, LMI allows you to borrow up to 95% of the purchase price of your home. In simple terms, that means you only have to save a deposit of 5%. This is not to be confused with Mortgage Protection Insurance which may cover your mortgage repayments in the case of illness, injury, unemployment or death.
It is important to remember that LMI protects the “lender” NOT the “borrower” in the event of a default on your home loan. Under the terms of most policies, a bank can make a claim on the policy if a borrower defaults on their home loan and the sale of the property does not cover the outstanding debt.
You, the borrower pay the Mortgage Insurance premium and depending on the lender, the options of how this can be paid differ, as does the actual premium. This is where the support of a Mortgage Broker can be crucial, as the treatment of the Mortgage Insurance premium across lenders can make a significant difference to your capacity to buy your new home.
To give some context, outlined below are some example Mortgage Insurance premiums under different deposit scenarios, these are based on a $400,000 purchase price:
- 5% deposit ($20,000): Estimated premium of $14,000
- 10% deposit ($40,000): Estimated premium of $7,500
- 15% deposit ($60,000): Estimated premium of $3,750
Recently, several lenders have changed the way the Mortgage Insurance premium can be funded, a simple example of two options currently available are as follows:
- You may be able to obtain a 95% loan and have 100% of the Mortgage Insurance premium capitalised to the loan amount, meaning it is not an additional upfront expense.
In this instance, you would need to contribute 5% of the purchase price plus the relevant purchase costs to complete the purchase. As a guide, perhaps a contribution of $24,000 for a $400,000 first home purchase.
- Many major lenders are now only lending 95% INCLUSIVE of the Mortgage Insurance premium, meaning you need to contribute towards this cost upfront.
In this scenario, you would need to contribute 5% of the purchase price, PLUS the mortgage insurance premium AND the relevant purchase costs to complete the purchase. This may require a contribution of $38,000 for a $400,000 first home purchase.
Buying a home is likely to be one of your biggest investments so it is extremely important that you make an informed decision when selecting a loan, particularly if you are dealing with Lenders Mortgage Insurance. Give us a call on (07) 3491 8822 and let us help you take the stress out of that decision today!