18 Apr 2017

Do You Really Need a 20% Deposit?

First Home Deposit

Many Australians would love to buy their first property and officially enter the property market. But saving up the 20% for a deposit can feel like an overwhelming proposition. In most cases, a 20% deposit will be a six-figure sum equating to multiple years’ worth of income.

But there are many benefits to buying property sooner rather than later. In most cases, people eager to own property should look to purchase as soon as possible. The economic climate can change in an instant, creating ripple effects across the property market that result in higher interest rates, property prices and more.

This presents a problem for the average future homeowner. Saving a deposit takes time, but time spent is money squandered. Fortunately, there are a few solutions, and Lenders Mortgage Insurance (or LMI) is one of them.

What Is Lenders Mortgage Insurance?

Lenders Mortgage Insurance (or LMI) protects homeowners from financial loss should they fail to make their mortgage repayments. It is set up as an insurance policy, and some lenders make it a mandatory part of a home loan contract.

Aside from protecting both lenders and homeowners, LMI allows for property purchases with much lower deposit amounts. Some home loan packages and lenders will lend up to 95% of the property value, requiring a deposit of only 5%. Some home loans require no deposit at all.

The smaller your deposit, the more costly the LMI. But those costs can easily be offset by the financial rewards reaped from entering the property market sooner. As always, it pays to speak to the experts.

How much does LMI cost?

There are myriad factors that affect the final cost of LMI aside from the size of your deposit, including but not limited to the size of the home loan, the property and the lender’s insurer.

In most cases, using LMI to enter the property market quickly is advisable. Property prices can rise, opportunities can vanish and interest rates can go up. There are additional considerations such as stamp duty and other tax implications as well.

There is no one-size-fits-all answer to whether or not you should save a larger deposit or buy sooner with LMI. But one thing is certain: You should absolutely speak to a credible lender about the pros and cons before making up your mind.

Mortgage House

At Mortgage House, we’re no strangers to the homeowner’s journey. It’s a long (but rewarding) one.

But don’t worry, we can help with that.

If you’re thinking of buying a home, or you are a second home buyer, you can contact us for advice about the best options for you when it comes to your mortgage. The cost of your mortgage can drastically affect your financial planning, so it pays to speak to the experts about it. You can use our calculators to find what’s the best loan for you.

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