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If you’re a first home buyer in Australia, there’s a good chance you’ve heard the term “Lenders Mortgage Insurance” (LMI). To learn more about LMI and how the process works, read more here.
Unfortunately, Australia’s booming property market has made it more difficult and costly than ever before to enter the property market. It’s not just the purchase prices that have skyrocketed. Transaction costs involved in settling a home loan have also increased substantially.
For many Australians looking to buy their first home, the idea of saving for a 20% deposit, only to be slapped with stamp duty and lenders mortgage insurance fees, can feel like an insurmountable task.
It’s stressful enough trying to apply for a home loan, let alone having to learn about the intricate and over complicated insurance policies to protect a lender when a borrower just wants to get into the property market.
The problem:
In generations past, ‘The Australian Dream’ of owning a home was often viewed as a journey with many stepping stones along the road. Entering the property market was seen as the first step on this long road, with many starting out with a simple unity purchase, followed by patiently building up equity in that first property, to then substantially upgrade.
In modern times, the transaction fees or ‘sunk’ costs that are associated with that first ‘stepping stone’ purchase can feel like money burned, which has turned home buyers off the idea of entering the market, if not entirely, than for several years.
*insert comparison of average age of borrowers now VS 30 years ago*
At YBR Home Loans and Resi Home Loans, we understand the challenges that first home buyers are battling to overcome, so we decided, enough is enough.
The solution:
YBR and RESI Home Loans, in partnership with Helia, are now offering a Monthly LMI option on home loan packages.
Monthly LMI, as the name suggests, is an alternative way of paying for Lenders Mortgage Insurance and should assist borrowers in entering the property market.
Rather than an upfront payment which can equate to many thousands of dollars, a monthly amount is charged following settlement of the loan. With monthly LMI, the premium stops if you sell the property, refinance the loan, or pay the loan down to a pre-specified amount. .
Traditional LMI needs to be paid for upfront (at loan settlement) and can be quite a substantial addition to a borrower’s costly first home loan.
The central issue for FHB’s is that traditional LMI protects a lender in the case that a borrower defaults on the loan, and is an insurance policy for the entire life of the loan (which is typically 30 years). It’s a significant up front cost that borrowers have to bear the brunt of, despite oftentimes only living in their first home for a few years.
Traditional LMI is also not transferable between lenders and outside of certain circumstances, there are no refunds available for traditional Lenders Mortgage Insurance products. Simply, Traditional LMI becomes a sunk cost, even if the intention is to only hold a particular property for a period of 3 – 5 years.
Who does it benefit?
- Borrowers that are either looking to aggressively pay down their home loan, or expect to benefit from a growth in value of their property.
- Borrowers that may be looking to sell and upgrade their property within the space of 5 years.
- Those that are looking to enter the market sooner and want to maximise their equity contribution.
Who does this suit?
- Borrowers who are purchasing their forever home (or investment property), and are likely to stick to paying the minimum on their home loan.
- Those that may be looking to borrow at the limit of their income and financial circumstances.
YBR, Resi and Helia partnered because of shared passion in assisting FHB’s enter the market. The availability of a Monthly LMI option provides those that are keen to get into the property market, with more flexibility in how they can achieve this.
If you’re looking for some advice on how to maximise your first home purchase and would like to discuss the different LMI options available, reach out to us today for an obligation-free chat with our experienced YBR Home Loans mortgage brokers.
