It appears first-home buyers don’t have a clear grasp of what Lenders Mortgage Insurance (LMI) does even with the increasing number of new loans with LMI.
Digital Finance Analytics (DFA), a poll that surveyed first-home buyers, found that 55% believe LMI protects them over the bank. 26% aren’t sure what insurance does.
Only one-fifth of first-homebuyers has any knowledge about LMI’s true purpose.
Raj Ladher, a Mortgage specialist, stated that many first-homebuyers believe LMI protects them because the name has the word insurance.
“However, this couldn’t be further from the truth,” he told Your Mortgage.
“I always advise clients, especially first home buyers, to speak with mortgage professionals to go over their particular circumstances.”
The knowledge gap exists among existing borrowers.
One-third of respondents don’t know much about LMI, but the other third believe it to be homeowner insurance.
A third of respondents were unsure how LMI works.
LMI Definition
LMI is an insurance policy which protects lenders from any losses if the borrower defaults.
Lenders typically require LMI when a borrower’s deposit is below 20% or when their loan-to-value ratio (LVR) — the value of the loan as a share of the total value of the property — is above 80%.
LMI doesn’t benefit borrowers but Mr Ladher claimed that it allows borrowers to move up the property ladder quicker and begin building equity.
He said that clients could have a 10% deposit but it would take them another year in order to save the rest of the 10%. This increases the risk of the market and they will need to continue paying rent.
“I encourage my clients to reduce their LMI payable through a 10% deposit and stamp duty costs.
“LMI increases significantly above 90% LVR.”
LMI loans are increasing in popularity
DFA’s study revealed a steady rise in loans with LMI.
Close to 79,000 new loans were registered by the DFA during the June quarter. This is however a decrease over the previous two quarters.
Although more than 90% of the new LMI loans are intended for owners-occupiers it is fascinating to note that LMI loans can also be used by investors.
Avoiding LMI
Mr Ladher explained that there are many options available to borrowers who have a lower LMI or want to avoid it entirely. He suggested that they make a deposit of no less than 20%. A guarantor loan is another option.
“Some banks will allow you to use a family parents property as a security guarantee which means you don’t pay any LMI at all,” Mr Ladher said.
Some banks will waive LMI if you have a 10% deposit if you’re in the medical, legal or accounting profession.
Homebuyers can get on the property ladder without needing to make a deposit. There are many government concessions and grants that will allow them to do this.
The government has recently introduced the Family Home Guarantee (FHG), which, in addition to the First Home Loan Deposit scheme, allows single parents and their dependents to purchase a home for as little as 2 percent deposit.
Cindy Chalker was a single mom of two kids and was able to use several government programs, including the FHG, in order to buy a house for her family.
“Having rented most of my life, I’ve had times where I’ve signed a lease and six months in the owner decides to sell,” Ms Chalker said.”
Cindy Chalker. Image provided.
“Once you have your own home, your kids don’t have to worry about moving places.”
Ms. Chalker was successful in obtaining a pre-approval by Great Southern Bank. Now, she is looking for a place to call home in Queensland.
“It was a huge deal when I received the approval mail. She said, “I was running around the house.”
Megan Keleher from Great Southern Bank is the chief customer officer. She said that saving money for a deposit as well as factoring LMI costs are still a significant financial burden for single-parent families.
“That’s why the Family Home Guarantee is going to be such an important program moving forward, assisting families who could comfortably afford mortgage repayments purchase a home with a much more achievable deposit of just 2%,” she said.
