Despite one third of prospective home buyers needing lenders mortgage insurance (LMI), more than two in five have admitted to not understanding it, according to Mortgage Choice and CoreData’s Evolving Great Australian Dream 2018 whitepaper.
“Our data found that a majority of home buyers are in the dark when it comes to LMI and what it entails,” Mortgage Choice chief executive officer Susan Mitchell said.
“According to our survey, only 32.1 per cent of prospective buyers accurately stated that LMI is designed to protect the lender if a borrower can’t repay their mortgage.
“Another 8.2 per cent of respondents thought LMI protected the borrower, while 17.6 per cent believed it protected both the borrower and the lender.”
Buyers aged 29 and under (47.3 per cent) were the most likely not to know what LMI was, while the 50 to 59 age group (40.75 per cent) were the most knowledgeable.
Victoria (46 per cent) had the highest proportion of buyers who did not know what LMI was and NSW buyers topped the states when it came to correctly defining LMI at 34.6 per cent.
Ms Mitchell said it was concerning that such a large proportion of Australians had either a limited or no understanding of LMI and that mortgage brokers can play an educational role for borrowers.
“For many first home buyers, LMI is likely to be a cost they have to pay to get into the property market, particularly if they do not have a deposit that is at least 20 per cent of the purchase price,” she said.
“According to CoreLogic, the median dwelling value in Australia is $554,605, and for a first home buyer to avoid LMI, they would need to save $110,921 for a 20 per cent deposit and they would still need to have additional funds to cover costs such as legal fees and stamp duty.
“That is quite large sum to save and it only increases if a buyer is looking in cities such as Sydney and Melbourne.
“While LMI on the surface seems like a fee to be avoided, it does have the benefit of helping a buyer purchase a home with a smaller deposit, thereby allowing them to get onto the property ladder sooner rather than later.
“A buyer can choose to delay their property purchase to save a sufficient deposit, but the reality is property prices have risen consistently and the longer they delay, the more likely they are to miss an opportunity. Ultimately, in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.”
Ms Mitchell said it was important for first home buyers to have a clear understanding of LMI so that they know how it affects their ability to get into the market.