Borrowers ‘in the dark’ over LMI

Of the respondents, 32.1 per cent accurately described LMI as a measure applied to protect lenders if a borrower defaults on their mortgage.

However, 8.2 per cent of borrowers thought that LMI protected borrowers, while 17.6 per cent thought it protected both lenders and borrowers.

The research also found that 44.8 per cent of women did not understand what LMI was, compared to 37.3 per cent of men.

Respondents aged 29 and under were the most likely not to know what LMI was (47.3 per cent), while those aged 50 to 59 were most likely to know what LMI was (with just 40.7 per cent not knowing).

On a state-by-state comparison, Victoria had the highest proportion of buyers who did not know what LMI was (46 per cent), followed by Queensland (40 per cent), Western Australia (39.6 per cent) and NSW (38.8 per cent).

“Our data found that a majority of home buyers are in the dark when it comes to lenders mortgage insurance and what it entails,” Mortgage Choice chief executive officer Susan Mitchell said. 

“For many first home buyers, LMI is likely to be a cost they have to pay to get into the property market, particularly if they do not have a deposit that is at least 20 per cent of the purchase price,” Ms Mitchell added.

“The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years.”

According to CoreLogic, the median dwelling value in Australia is $554,605, and for a first home buyer to avoid LMI, they would need to save $110,921 for a 20 per cent deposit and they would still need to have additional funds to cover costs such as legal fees and stamp duty.

“That is quite large sum to save and it only increases if a buyer is looking in cities such as Sydney and Melbourne,” Ms Mitchell said.

The Mortgage Choice CEO explained that LMI can provide prospective borrowers with a way into the property market, without having to save for a 20 per cent deposit.

“While LMI on the surface seems like a fee to be avoided, it does have the benefit of helping a buyer purchase a home with a smaller deposit, thereby allowing them to get onto the property ladder sooner rather than later,” Ms Mitchell said.

“A buyer can choose to delay their property purchase to save a sufficient deposit, but the reality is property prices have risen consistently and the longer they delay, the more likely they are to miss an opportunity.

“Ultimately, in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.”

Moreover, Ms Mitchell noted alternatives to both LMI and saving for a 20 per cent deposit, such as using a guarantor (however, she has also warned of the potential risks of using a guarantor — a risk which has been painfully brought to light during the royal commission hearings this week).

Ms Mitchell added that first home buyers should should speak to a mortgage broker to help “guide you through the process of purchasing a property, from getting the best rate as part of the home loan application through to settlement”.

“They can explain the various options and costs involved, including LMI, thereby ensuring that you can confidently achieve your goal of home ownership,” the CEO said.
    
“As property prices continue to relax, there has never been a better time for first home buyers to purchase. Therefore, it’s essential they have a clear understanding of LMI so that they know how it affects their ability to get into the market,” Ms Mitchell concluded.

[Related: Less than 5% of FHBs use a guarantor to buy a home]