The mortgage brokers at Smartline Rockingham can help you avoid the biggest mistake made by first home buyers in WA.
When first home buyers in WA purchase homes, they are “among the biggest borrowers” in Australia, according to data supplied to Perth Now. 80% of those who buy their first homes borrow so much that they have to purchase Lenders Mortgage Insurance (LMI). Nearly 60% of first home buyers borrow more than 90% of the purchase price.
Why This Can Be a Problem
Buying LMI is an added expense that can make it more difficult to make loan repayments. Even if you don’t have difficulty making the repayments, it is not good financial practice to spend extra money when you don’t have to.
LMI isn’t always a bad idea. In fact, it can often be the biggest factor that allows a person to purchase their first home. If LMI is the difference between being able to buy a home and not being able to buy a home, then we think it is a great idea. If you have no resources to make a 20% deposit on your home, it is much better to get into your first home ASAP than it is to keep renting.
What is LMI?
LMI is a policy that the lender forces you to buy which pays them if you default on your loan. While some home buyers think LMI protects them, it is actually the lender who is protected. If you borrow 80% or more of the purchase price of your home, the lender will purchase an LMI policy and add the fee onto your home loan.
Do You Really Need LMI?
When getting ready to purchase a home, especially your first home, the first question you should ask yourself is, “Can I find 20% of the purchase price for my deposit?” For lenders, the choice is cut and dried: if you don’t have 20% of the purchase price, they will take out an LMI policy.
In other words, if you can’t get your hands on 20% for a deposit, you need LMI. If you can make the 20% deposit, you don’t need LMI, except in rare cases where the lender has determined your risk potential high enough to warrant LMI.
If you don’t have enough money right now to make a 20% deposit, you have three basic strategies for avoiding LMI.
The first strategy is to have your parents act as guarantors for the loan. If you are unable to make payments, your parents are responsible for making them for you. If your parents are able to do this, it is preferable to the added expense of LMI showing up in your monthly loan repayments.
The second strategy is to borrow enough money to make the down payment. The most common source, like the first strategy, is parents. If parents or other family members can loan you enough money to make that 20% deposit, you won’t be required to purchase LMI.
The third strategy: put your dream of having your own home aside for a while and save up enough for a full deposit. Usually, because of the volatile nature of the real estate market, we recommend becoming a homeowner as soon as you can possibly do it.
The reason we always recommend buying over renting is that real estate prices tend to rise every year, with rare exceptions. For example, while Perth prices are actually down 1.79% from 31 August 2014 to 31 August 2015, Sydney prices are up 17.55% and Melbourne prices have risen 10.59% in the same time period.
When the prices rise, so does the amount you need for your down payment. For example, 20% of $400,000 is $80,000, while 20% of $440,000, which would represent a 10% rise, is $88,000. While there are some ebbs and flows in the market, it still tends to rise every year and it doesn’t get easier to purchase a home when the prices do rise.
Call the Professionals
The mortgage brokers at Smartline Rockingham have been serving you since 1999. We have a wealth of experience in helping people just like you buy their first homes. To learn more, call us today: (08) 9527 1800.