It’s a common frustration for many home buyers to experience what feels like an endless struggle to save the deposit – normally 20% – while all the time, house prices seem to keep going up.
And at Smartline, it’s our recommendation that you persevere until you’re able to reach the required amount.
But if patience isn’t your strong point, under some circumstances, lenders will offer a loan with a lower deposit. However, to do that they may require you to pay Lender’s Mortgage Insurance (LMI).
LMI protects the lender in the event that you default on your home loan. Should the lender need to sell your property to recover their funds, LMI makes up any shortfall.
It’s important to note though, LMI doesn’t provide you with any protection – it’s there for your lender’s protection only.
As much as LMI might seem tempting to get you into your new home quicker, you should bear in mind that it may be a costly option.
For example, a 10% deposit on a $500,000 loan could attract an LMI fee of around $13,000* or more.
LMI can either be paid upfront or, included into the loan. However, paying the premium over the life of the loan means that it will cost more in the long term.
So, how to avoid paying LMI?
The obvious way is to keep saving until your home loan deposit brings your loan-to-value ratio (LVR) down to 80% or below.
Another way to avoid LMI may be through a family guarantee loan. This allows the bank to use some of the equity in property owned by a close family member (usually a parent) to help out as extra ‘security’ for your loan.
If you’re in the market for home finance and you would like to know more about either LMI or family guarantee loan options, please give me a call for a no-obligation chat.
I’m happy to advise, and as always, my service is at no cost to you.