How to buy a property if you missed out on first home buyers deposit scheme
With the federal governments first home buyers scheme restricted to 10,000 applicants per year as well as eligibility purchase prices well below capital city median house prices on the eastern seaboard, it’s not likely that first home buyers in Sydney, Melbourne, Canberra and Brisbane will benefit much, if at all from this offer.
What then? Well, this leaves first home buyers (as well as non-first home buyers) with the alternative they have always had when they couldn’t accumulate 20% deposit for their dream home. And this alternative is called Lenders Mortgage Insurance or LMI for short.
Raising a 20 per cent deposit can be a challenge but with LMI you may be able to side step this obstacle.
Before LMI was available, lenders would usually lend up to 80 per cent of the value of a property, leaving the buyer to chip in the rest.
When lenders agree to lend you money there is a small risk that they won't get the money back should you default on your repayments. An 80 per cent loan is therefore recognised as the 'safe' risk level by most lenders – should they have to repossess the property.
LMI was introduced some time ago to enable lenders to offer higher percentage loans. The insurance essentially protects the lender for the amount above the 80 per cent level should the borrower default and ultimately end up with their property being repossessed.
Mind you, not everyone without 20 percent deposit, regardless of being first home buyer or not, has to pay LMI when purchasing a property. There are several lenders on loansHub panel that waive LMI premium for eligible professionals in Accounting, Engineering, Medical and legal sector. For everyone else….
Open opportunities with LMI
With the backing of LMI, lenders are willing to lend as much as 95 per cent of the property value as they are protected – and this can make a significant impact on the amount buyers need to put in themselves as a deposit.
As the borrower you pay the premium, but while it may seem like you are paying insurance cover to benefit somebody else, LMI makes owning a home easier and more affordable.
It could also mean getting into your own home or securing, an investment property, years earlier than imaginable if a 20 per cent deposit was the only option.
Imagine how long it could take some would-be buyers to stump up a 20 per cent deposit on the average $980,000 Sydney home? That's a sum of $196,000 on top of all the other expenses associated with buying a house.
By reducing the deposit required, many borrowers are able to purchase a home much earlier, or buy a better property than they would otherwise have been able to afford.
Alternatively, for property investors, lenders mortgage insurance allows borrowers to have higher borrowing ratios, giving them the opportunity to maximise negative gearing benefits.
LMI premiums are calculated on the amount that you borrow – and as you'd imagine, the higher percentage loan the higher the premium. But the good news is that the LMI premium can often be capitalised into the overall loan, thereby reducing upfront costs.
It's important to bear in mind that the higher the loan amount you take out, the bigger the repayments. It's essential that you think carefully about what your monthly budget can accommodate to ensure that you don't over stretch yourself.
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This article via Which Investment Property does not constitute advice; readers should seek independent and personalised counsel from a trusted adviser that specialises in property, a tax accountant and property design specialist.