Mortgage insurance: big bad enemy or misunderstood opportunity?
Mortgage insurance is often seen as “the great evil” by home hunters, desperate to avoid this additional cost when buying property. Usually if you have less than a 20% deposit (through cash or other equity) your lender will ask you to insure them against your possible default. So if you’re buying a $500,000 home for example and have just $50,000 deposit, you may need to pay a Lenders Mortgage Insurance (LMI) premium of around $8,800.
Notice the insured party is your bank, not you, with this policy designed to cover their backside if you default at any time during the term of the loan and the sold-up asset doesn’t cover the balance of your loan.
So the simple question for buyers is this: Wait to buy until you’ve saved that extra $50,000 (in the above example) or cop the bill for $8800? The premium is a once-off for the life of that loan, and of course once your equity tops 20% (through either debt reduction or capital gain) you can shop for another loan without LMI.
A recent article in Australian Property Investor magazine points out the obvious – if home prices are rising then LMI might not be the bid bad enemy we all assume it to be. Deputy Editor Lauren Day: “I’ve never been a good saver but I’ve always been pretty good with bills and making repayments on time. So I see LMI as a fabulous opportunity to buy in a market sooner rather than later. Around Australia, many markets are now rising – often rising faster than you can save. So for example, it might take 10 months to save a $30,000 deposit but when property booms, values can easily rise by that much in the same period of time.” The article also reminds investors they can likely claim the premium as a tax deduction.
In our example above the LMI premium is around 1.76% of the property value. So if you want to buy before you’ve saved the full 20% deposit, and if you think home prices are rising, you might feel this is a cost worth having.
[Now a quick comment: We’re real estate agents and we love to see people buy property. Lots of it. But we don’t believe in over-extending yourself and getting too deep into debt.]