One of the biggest questions for any first-time home buyer is “should I be holding off on purchasing a home to avoid paying Lender’s Mortgage Insurance?”. There is no definitive answer to this as it all depends on your personal circumstances. So, let’s take a look into what LMI involves & how it affects you…
Lender’s Mortgage Insurance is an insurance policy that protects lenders from financial loss if the borrower defaults on their home loan repayments. On average, the cost of LMI is around $8-9k on a $500k property with a 10% deposit, but premiums vary depending upon individual borrower profiles. By paying LMI, first time buyers can get into the property market with a smaller deposit. Buyers can even add the cost of LMI to their loan, meaning they don’t have to fork up the money upfront.
In the past four years, property values in Sydney have risen at a rate of over 10% per year, according to Corelogic. Taking that into account would mean anyone who used a 10% deposit & paid the LMI, would have made it back, plus more, in the first 12 months of ownership.
Many first-time home buyers opt to keep saving to get their deposit up to 20%, only to watch home values rise beyond what they would have paid in LMI.
Not always, there are pro’s & con’s to taking out LMI, which all depend on your personal circumstances.
The biggest benefit of taking a loan with LMI is that it allows you to get invested sooner. If you don’t borrow beyond your means & property values are continuing to rise, LMI is certainly worth consideration. A property worth $500,000 now would require $100,000 deposit at 20%, if you were to wait 2 years to save & values kept rising at 10% per year, the same property could be worth $600,000 & require $120,000 deposit at 20%. By taking a mortgage with LMI, a buyer would cover the cost & be making a profit within months of purchase.
However, some things to consider are the high costs, especially if you’re purchasing a large home & If property values don’t continue to rise like they currently are, your equity would build at a slower rate, which could make it harder to refinance your property in the future.
It’s also very important to understand that lender’s mortgage insurance does not protect borrowers in the event of a defaulted home loan. If a lender is forced to sell the home due to an unpaid loan, then the insurer generally has the right to pursue the borrower for any shortfall.
Most of the time it’s going to be more beneficial to have a 20% deposit ready to go when purchasing your fist home, however you need to weigh up the pros and cons of giving yourself more time to save, compared to getting into the property market earlier.
Buying your first home can be an exciting time, but ensuring you are taking the best loan for your new home can be difficult. If you’re looking to purchase a home & want to learn more about Lenders Mortgage Insurance & if it’s right for you, contact Euphoria Loans today for a free face to face consultation.