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Do you really need a 20% deposit?

Back in the day, having a 20% deposit when buying a home was non-negotiable.   Today, having a smaller deposit and getting Lenders’ Mortgage Insurance (LMI) is widely accepted. 

Do you really need a 20% deposit?

17 September 2019

Back in the day, having a 20% deposit when buying a home was non-negotiable, but times, they are a-changin’.

Today, having a smaller deposit and getting Lenders’ Mortgage Insurance (LMI) is widely accepted.

What is Lenders’ Mortgage Insurance (LMI)

LMI is a one-off insurance premium which is payable by the borrower and protects the lender against the loss it may incur if the borrower is unable to repay their home loan.  LMI will usually apply when a borrower wishes to borrow more than 80% of the value of a property (that is, where your loan-to-value ratio (LVR) is greater than 80%) or, to put it another way, when your deposit is less than 20% of the property’s value.

The LMI premium may be included in your home loan, so you don't need to pay it upfront, but it will reduce the amount available for the purchase and will increase the amount of your repayments. 

The amount of LMI you have to pay will depend on the state you purchase in and your LVR. The higher your LVR, the higher the LMI premium will be. LMI can be a deal breaker for some borrowers, so it’s important to work out what your LVR is likely to be based on your savings and projected savings.

Do you really need a 20% deposit - pic 1 - girl at desk
 LMI could add a significant cost that you will need to factor into your budget for a new home. Picture: Getty

The pros and cons of LMI

Scott Cheetham, a RAMS Home Loan Specialist from Mona Vale on Sydney’s northern beaches, says while there are pros and cons with LMI, it’s no longer the “bogey-man” previous generations thought it was.

He says it could be possible to buy a property with less than a 20% deposit.

In fact, Cheetham says, many first home buyers across Australia simply wouldn’t be able to buy a property without paying LMI, which is worked out on the percentage of the property value borrowed and the loan amount. It can be paid as a lump sum or added to the loan and paid off.

LMI is a reality of the current housing market and it’s certainly becoming more and more accepted. It’s not as black and white as it used to be, when people said to avoid it at all costs,” he says.

Do you really need a 20% deposit - pic 2 - red door
 Paying LMI in the current environment is a significant cost that you need to factor in. Picture:

If you were to borrow $450,000 to purchase a property valued in NSW at $500,000 (which you intend to live in) with a 10% deposit, you’d be required to pay approximately $9,135 in LMI. The $9,135 in LMI would be payable in addition to any bank, legal or government fees and charges. 

Cheetham says buyers currently renting need to weigh up paying rent for longer – to save a bigger deposit and avoid LMI – with the upside of getting into the market sooner.

“Every situation and every market is different, so it’s something you need to look at closely,” he says.

Bonnie Caine, a 29-year-old who recently purchased a one-bed off-the-plan apartment in Sydney’s Sutherland Shire for just under $600,000, understands not having a 20% deposit. She bought her place with a 5% deposit, plus LMI, bank, legal and government fees and charges.

It was a no-brainer for the account manager, who is sharing in Balmain while her place is built. “I wasn’t concerned, because by paying the LMI, I was able to get into the market and experience capital growth,” Bonnie says.

“My property has gone up by more than 10 times the LMI fee,” she says.

“I had the time up my sleeve and it was the only way I could do it. For me, the potential for capital growth outweighs the fees. It’s simple: black and white,” Bonnie says.


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