4 in 5 first-home buyers in the dark about LMI

By Gerv Tacadena

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.

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.

A poll conducted by Digital Finance Analytics (DFA) showed around 55% of first-home buyers believe LMI protects them instead of the bank while 26% are not sure what the insurance does.

Only one in five first-home buyers have the knowledge about the true purpose of LMI.

Your Mortgage home loan specialist Raj Ladher said many first-home buyers think LMI protects them due to the name having the word insurance in it.

"However, this couldn’t be further from the truth," he told Your Mortgage.

"I always encourage clients, especially first home buyers to speak with a mortgage professional to run through their specific circumstances."

Among existing borrowers, the knowledge gap still exists.

Only a third of them know what LMI does while the same portion thinks it is an insurance for the homeowner.

Less than a third remained unsure of how LMI works.

Defining LMI

LMI is an insurance policy that covers lenders against any losses they may incur if the borrower defaults on the loan.

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%.

Mr Ladher said while LMI does not benefit borrowers, it does provide a ticket for them to get onto the property ladder sooner and start building equity.

"If a client had a 10% deposit and it would take them another year to save the other 10%, the risk there is the property market could increase by more than the LMI premium along with them having to continue paying rent, etc in the meantime," he said.

"I encourage clients to reduce their LMI payable by having a 10% deposit plus costs for stamp duty and other related fees.

“LMI increases significantly above 90% LVR."

Growing number of LMI loans

The DFA study showed a consistent increase in the number of loans with LMI.

Over the June quarter, close to 79,000 new loans recorded by the DFA have LMIs. This, however, represent a decline from the previous two quarters.

While over 90% of these new LMI loans are for owner-occupiers, it is interesting to see that gains are also consistent among investors taking out an LMI loan.

Avoiding LMI

Mr Ladher said borrowers can consider several options that can reduce their LMI payable or avoid it altogether should they apply with a deposit of less than 20%. One option is to get a guarantor loan.

"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.

"If you are in the medical, legal, accounting profession, some banks will allow you to waive paying LMI should you have a 10% deposit."

There are several government grants and concessions that allow homebuyers to get their foot on the property market without having to meet the typical deposit requirement.

Aside from the First Home Loan Deposit Scheme, the government recently rolled out the Family Home Guarantee (FHG), which allows single parents with at least one dependent to get a home with as little as 2% deposit.

Cindy Chalker, a single mum of two kids, was able to take advantage of several government schemes, including the FHG to secure a home 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, a single mum of two kids, was able to take advantage of several government schemes, including the FHG to secure a home for her family.

Pictured: Cindy Chalker. Image supplied.

“Once you have your own home, your kids don’t have to worry about moving places.”

Ms Chalker was able to secure a pre-approval with a 2% deposit with Great Southern Bank. She is now looking for a home in Queensland.

"It was such a big deal when I got the approval email. I was jumping around the house," she said.

Great Southern Bank chief customer officer Megan Keleher said saving for a deposit and factoring the cost of LMI remain to be a financial burden for many 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.

Header photo by Startup Stock Photos from Pexels

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