No deposit? No problem. Understanding LMI
Are you a single saver? Or perhaps you’re trying to get a past car loan, or some student debt under control? Sometimes life can throw a curveball at your money plans, particularly if you’re saving for a long term goal such as a house deposit. But even if you’re not saving as much as you’d like, you still might be able to pop that housewarming champagne sooner than you think!
When it comes to first home budgeting, you may have been told that unless you have at least 20 percent of the total house price saved you won’t get approved for a loan. Historically this is true but is no longer the case, with many people obtaining finance with as little as 5 or 10 percent. The only catch? Anything under 20 percent will likely cause your lender to tack Lenders Mortgage Insurance onto your loan — also known as LMI for short. This ‘insurance’ covers the bank if you default on your loan and it comes out of your pocket. So, what to do?
If you’ve got 5-10 percent saved as a deposit, paying LMI is a small price to pay to crack into the property market. It can also be included in your loan repayments so that it’s spread out over the term of your loan. In other words, you won’t even know it’s there!
What if you have under 20 percent but don’t particularly fancy paying mortgage insurance?
To reach that illusive two-zero, remember that your deposit can be made up of a combination of genuine savings, such as a regular contribution to a savings account for at least three months, and non-genuine savings, such as a gift from family. It does vary from bank to bank so it’s worth speaking with a broker to understand options are available, and what suits your personal financial situation.
The Federal Government’s First Home Loan Deposit Scheme, which launched earlier this year, is another way to tackle this — and a lot of people have already taken up this offer. Under the scheme you pay a minimum deposit of 5 percent, and the government basically acts as a guarantor for the remaining 15 percent — meaning you can get your new home and avoid LMI at the same time!
An additional option is to get a guarantor for your loan, usually Mum and Dad, where they offer their own property as extra security. This does have its drawbacks, as it makes it harder for your folks to sell their property or use the equity themselves, but worth considering if you have a good repayment history and they’re financially secure.
The best thing to do is assess your personal situation. If the market is dipping and houses are becoming cheaper, LMI is a small cost to secure your first home! By the same token it does add an extra chunk onto your loan, so take into consideration your repayment amounts and if it’s something you can afford!