In a recent study by Core data & Mortgage Choice, it was revealed that 42.1% of buyers had little to no understanding of what the ‘dreaded’ LMI was, while 32% revealed they would need to pay it in order to get into the property market.
Put simply, LMI is the insurance used to protect only the lender from losses when a mortgage holder cannot pay the loan and all costs aren’t recovered at foreclosure. It is applied to home loans where the deposit is less than 20% of the purchase price.
So, it’s insurance for the lender and therefore the lender pays it right?… Wrong!
This cost is passed on to the purchaser and added to the total borrowing amount. This is a fact that only 32.1% of prospective purchasers could identify, while another 8.2% thought is protected the purchaser and 17.6% believed it protected both lender and purchaser.
With housing becoming less affordable for first home buyers due to strong growth in recent years, the reality is that saving for a home loan deposit is going to be a major challenge and likely to be necessary evil to getting their foot in on the property ladder.
As of March 2018, Adelaide metropolitan median house prices sat at $470,000. Meaning to avoid LMI, purchasers would need to have saved a minimum deposit of $94,000 but would still have to add on additional costs such as legal fees and stamp duty.
So, is it worth paying?
Well in reality, whilst buyers can choose to delay their purchase until they have a sufficient deposit, it is likely that prices will have risen further and the required deposit will be even greater by then. You may just constantly be chasing the prices up.
Ultimately in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.
Original article: 2 in 5 in the dark about LMI – your investment property