The deposit alternative

Saving enough money for a deposit is often the biggest hurdle when it comes to home ownership. However, by taking out lender’s mortgage insurance (LMI), you may be able to get into your dream property sooner.

LMI is insurance that protects the lender in the event that you, the borrower, default on your home loan.

This type of insurance applies to loans that pose a high risk to the bank because you are borrowing a high percentage of the value of the property (the ‘loan to value ratio’ or LVR).

As a rule, lenders usually require you to take out LMI if you borrow more than 80 per cent of the property’s value.

LMI is a one-off premium based on several variables, including deposit size, loan size and type of loan.

 In most cases, your lender will allow you to capitalise the LMI premium so that it is added to the loan amount and paid off as part of your regular repayments rather than as a lump sum. Several LMI calculators are available online which you can use to estimate the LMI premium you would pay for a range of lenders and insurers.

So, the main question that borrowers are faced with is whether to buy now with a smaller deposit (and a bigger loan) or to save for later?

However, the property market is continually changing and by the time you have saved a deposit, the properties in your price range may have grown in value, meaning you would need to save more for a deposit of the same percentage.

For example, if it takes you two years to save a 20 per cent deposit on a $400,000 property, you may find that in that time the same property is now worth $440,000 and you need to save more to make up the 20 per cent deposit. If you had utilised LMI insurance you would have already started building equity in the property.

However, this can work in the reverse as well. Property values could drop while you are saving and the deposit required could end up being smaller, allowing you to avoid paying LMI.

It is impossible to accurately predict future market trends, therefore there is a certain amount of risk involved in each option – it will ultimately depend on your personal situation.

There are several options available to borrowers looking to enter the market sooner rather than later. To find out if LMI could help you realise your property ownership dreams sooner, contact us today!

The deposit alternative
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