House prices are slowing, offering those keen to buy a home an opportunity to jump onto the property market.
But just as the market turns, banks are tightening lending requirements. For them, a downturn in prices means the value of the property may not cover the full cost of the loan, leaving them at risk if you default.
There is a way, however, to take advantage of lower prices, even if you haven’t been able to save for a 20 per cent deposit, and still make the banks feel comfortable.
It’s called Lenders Mortgage Insurance, and according to a recent survey* 42% of prospective home buyers have admitted they don’t understand how it works. Mostly, they can’t work out who is protected – the buyer or the bank?
How it can work for you
If you don’t have at least a 20% deposit, and you don’t want to wait to save for the minimum, it may be a good option to get this insurance.
It means you can borrow up to 80% of the property value – Tip: the “value” is determined by a valuer, an independent representative engaged by the lender, not the real estate agent’s estimate or the sale price.
The LMI policy can cover the rest.
Use Lenders Mortgage Insurance to your advantage
Despite the fact that LMI is designed to protect the lender, it actually creates a number of key benefits:
- You could buy a home sooner as you don’t need to save as much as you think
- You don’t have to save for LMI – you can add it to your loan and pay it off
- Buy at today’s prices and take advantage of potential market increases sooner
- It’s not restricted to first home buyers
- As a one-off lump sum, there is no recurring annual premium or renewal each year
How it could pay off
Here’s a hypothetical example^. Jenny and Bill purchase a home for $600,000 in Sydney and pay LMI of $10,000 because they only have a 10% deposit. They add the LMI to the loan so their repayments are on a total loan amount on $610,000. They move in and begin enjoying their new home.
Over the next 2 years, their property value increases and is now worth $800,000. If they had held off buying to save a bigger deposit, after renting costs, they would have saved $20,000 per year, or $40,000 over the 2 years. Instead, they have avoided rent, gained an extra $200,000 in equity in their home, and now owe less than 80% on their home. In fact, if they had saved and waited to buy, they’d have to save 30% more to have a 10% deposit and they may not have been able to afford the same house!
More good news
Not all lenders enable you to borrow up to 95% of the purchase price with LMI, however Easy Street is one of the few that do, even for investment properties.
When do you need mortgage insurance?
Are you looking to purchase a home? To understand how much of a deposit you need, why not talk to an Easy Street Loan Expert.
* Source: Mortgage Choice and CoreData’s new Evolving Great Australian Dream 2018 whitepaper.
All lending subject to lending guidelines. Terms and conditions, fees and charges apply – details available on application.
This information is general advice only and does not take into account your objectives, financial situation or needs (your “personal circumstances”). Before deciding whether to buy any product you should consider your personal circumstances. You should read and consider the Terms and Conditions when deciding to use any product (terms and conditions, fees and charges may apply). Our product Conditions of Use are available on our website.
Easy Street Financial Services is a division of Community First Credit Union Limited ABN 80 087 649 938 | AFSL and Australian credit licence 231204 | BSB No 512 170
^ Example provided uses fictional names only. The circumstances and outcomes may differ and there is no guarantee the same market conditions will prevail for you.