Borrowers turn to LMI as market booms

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With the property market increasingly robust, consumers would rather borrow with low deposits and pay LMI than save for a larger deposit to avoid the extra expense.

First time buyers in particular have realised that by the time they have saved a 20 per cent deposit, property prices will have substantially increased due to the booming market.

“Rising property prices in many markets and a low interest rate environment may make lender's mortgage insurance (LMI) an increasingly attractive solution to first home buyers looking to enter the property market,” Bridget Sakr, chief commercial officer of Genworth Australia, told The Adviser.

“One in two prospective first home buyers consider the goal of homeownership to be unrealistic… having said that, one in two consumers also recognise – with low rates and prices on the rise – that now is a good time to buy, but many feel saving a 20 per cent deposit is unrealistic.”

Elite broker and managing director of 1st Street Home Loans Jeremey Fisher told The Adviser he has observed this trend first hand, although he remains sceptical of the merits.

“We’re definitely seeing it. We’re getting some short-term panic from first home buyers because they think they're going to miss the market,” he said.

“The deposit is important obviously, because the more you have the lower the loan, but what we need to make sure is that the affordability and the repayments are kept in perspective.”

Mr Fisher said the combination of low rates, lack of stock and the spring market is whipping buyers into a frenzy.

“We need to make sure that their commitment to taking on that lender's mortgage insurance is done for the right reasons, to get them into the property faster,” he said.

“Buying with a smaller deposit isn’t really a positive. I would personally prefer if a client saved for a larger deposit before moving into a property. If they have some substantial savings behind them it shows that they can achieve those financial commitments.”

However, the trend doesn’t appear to be receding, with research from Genworth pointing to a future with much older first home buyers.

“Our research shows that 16 per cent of prospective home buyers have been saving for a deposit for more than five years,” said Ms Sakr.

“This group can enter the property market sooner with LMI and cease having to juggle paying rent, making large lifestyle sacrifices and saving for a deposit at the same time – particularly when rising prices keep shifting the goal posts.

“They can also potentially enjoy capital gains on their property which is not possible if you’re renting or still living at home,” she added.

However, Mr Fisher believes consumers will always take as much as they can.

“The banks are lending at 90 to 95 per cent. If the banks did tighten it up I would be fully in support of that,” he said.

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