Why Paying Lenders Mortgage Insurance (LMI) Can Be a Smart Move

What is Lenders Mortgage Insurance?

LMI is a fee charged by banks when you purchase a property with a deposit of less than 20% of the purchase price. If you can save up a 20% deposit, you avoid paying LMI altogether. However, with property prices continually on the rise, waiting to save up a larger deposit can sometimes cost you more in the long run.

The Cost of LMI

The price of LMI can run into tens of thousands of dollars, which is understandably daunting. Adding this expense to the already significant cost of buying a home can make it tempting to wait and save a bigger deposit. But delaying your purchase could have a bigger impact than you think.

The Risk of Waiting

Consider the impact of a rising property market. Delaying your purchase to avoid LMI might mean paying significantly more for the same property in the future. The longer you wait, the further behind you could fall as property prices increase.

A Real-Life Example

Let’s break it down in a real-life scenario:

Option 1: Paying LMI

• You want to buy a $900,000 property with a 10% deposit.

• You would need $90,000 for the deposit plus approximately $30,000 for stamp duty and government fees (this amount varies by state/territory).

• The cost of LMI is about $31,000, and this is capitalised into your loan amount.

• Total upfront funds required: $120,000.

Option 2: Waiting to Avoid LMI

• Instead of paying LMI, you decide to save an extra $90,000 to make up your full 20% deposit of $180,000.

• It takes you four more years to save that amount.

If you chose option 2, and during those four years property prices increase at an average annual rate of 5%, the $900,000 property you wanted is now worth $1,093,956. By avoiding the $31,000 LMI fee, you’ve missed out on $193,956 in property value gains.

Even worse, to make a 20% deposit now, you’d need $218,791—far more than the $180,000 you’ve saved! Additionally, stamp duty and fees would have also increased to approximately $41,000.

So in this example, choosing option 1 and paying LMI would have left you $162,956 ahead!

Keep in mind this is a made-up example and not to be used for financial advice, but it hopefully helps you understand the broader picture around owning a property.

The Bottom Line

While LMI isn’t the right choice for everyone, it can be a powerful tool for the right buyer. Instead of fixating on avoiding this cost, consider the bigger picture and long-term gains. Sometimes, challenging conventional wisdom can lead to smarter financial decisions.

Are you weighing up your options? Speak to us today to explore the best strategy for your circumstances.