Is lenders mortgage insurance worth the cost?
So you have been saving for a deposit, and you now have five percent saved. Should you be applying now and paying the lenders mortgage insurance (LMI) fee, or should you keep saving until you have saved the 20% deposit? (LMI is a fee you pay to protect the lender in case of default, it does not protect the borrower)
To make the decision it is important to fully understand what LMI would cost you and at the same time what it could cost you by not paying the LMI.
The cost of LMI depends on the loan amount and the percentage of borrowings compared to the purchase price. Please see the table below to give an indication. (please note that LMI cost vary from lender to lender, the below is approximate only. Some lenders will also allow you to add the cost of LMI to the final loan amount)
Loan to Value Ratio
LMI fee as a % of purchase price (approx)
LMI Fee (estimated)
Deposit Required (not including fees)
As you can see above the cost can be significant, but only applies when borrowing above 80% (in most cases). But what could it cost you by holding off when deciding to keep saving? If it takes you 12 months, there is a good chance you won't be saving a thing. You see, if you have a property growing at 3% per year, then it is pretty close to what you will be paying in mortgage insurance.
Brisbane property prices have grown at an average of 4.8% per annum for the past 50 years, a very similar rate to wage growth. Is it likely to grow at that rate going forward? I don't know. But even if I go conservative and say 3.5% average growth rate and it takes one year to save the deposit, by the end of the year the house has gone up at around the same amount as the cost of LMI.
Starting Price ($400,000)
After 1 year
After 2 years
After 3 years
Price growth at 3% (estimated inflation)
Price growth at 4.8% (50 year average for Brisbane)
Cost for holding off (Price increase, less LMI cost at 95%)
So you save for 3 years and the price has gone up by $46,409, but this is all to save approximately $14,000 in LMI.
At the end of the day, if saving the 20% deposit is going to take you longer than a year to save, than paying the LMI is likely to be a small price to pay. But the other problem we have is property doesn't go up in a straight line, we might have several years where the market is flat or even possibly falling followed by a year or two of exponential growth. So to make the choice more difficult, you need to be able to pick what the market is going to do. I think you now have 3 choices; 1) you can watch the market really closely and jump in the second it appears to be going up (although you won't normally know this until after a period when the market has already risen) 2) you can wait and hope it doesn't move while you save for a deposit 3)Or you can buy now, pay the LMI fee and play the game of averages where we see more winners than losers. But the one big caveat to all of this, "You make or lose your money when you buy, not when you sell". But if the purchase stacks up, make it as soon as you have enough deposit. Don't wait for the magic 20% as it will more than likely cost you more. The other benefit is, you can be that much closer to your next property as you can then keep saving a deposit for your next property.