About 2 in 5 prospective home buyers have no understanding of what Lenders Mortgage Insurance (LMI) is, according to a recent survey by Core Data and Mortgage Choice.

The firms’  Evolving Great Australian Dream 2018 paper found 42.1% of respondents said they were not sure what LMI was, and almost third (32%) said they would need to pay it in order to get into the property market.

This insurance is used to protect from losses when a mortgage holder is unable to repay the loan and the lender cannot recover costs after foreclosure.

Further results revealed only 32.1% of prospective buyers accurately stated that LMI is designed to protect the lender if a borrower can’t repay their mortgage. Another 8.2% thought LMI protected the borrower, while 17.6% believed it protected both the borrower and the lender.

“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% of the purchase price,” Mortgage Choice CEO Susan Mitchell said in a statement. “The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years.”

When grouped by state, Victoria (46%) had the highest proportion of buyers who did not know what LMI was, followed by Queensland (39.6%) and Western Australia (46.2%). New South Wales buyers topped the states when it came to correctly defining LMI at 34.6%. 

The median dwelling value in Australia is $554,605. For first home buyers to avoid LMI, they would need to save $110,921 for a 20% deposit and they would still need to have additional funds to cover costs such as legal fees and stamp duty, according to Mitchell.

While LMI on the surface seems like a fee to be avoided,  Mitchell said it has 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,” she added. “Ultimately, in the long run, LMI is a fairly small expense in the overall cost of purchasing a home.”

 

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