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Do you need mortgage insurance?

Nick Reade, Chief Executive BankSA

Saturday, 17 October 2015

If you’re saving to buy a home and are wondering how much you’ll need, there are two key figures to keep in mind.

The first is 5 per cent. That is the amount of the purchase price you will generally need upfront before most financial institutions will consider giving you a loan.

The second is 20 per cent. If your deposit is less than 20 per cent of the purchase price of the home, you will generally need to pay lenders mortgage insurance (LMI).

Designed to protect lenders against losses in the event that the borrower defaults on their home loan, LMI is calculated as a percentage of the loan amount and will vary depending on how much you borrow and your loan-to-value ratio (LVR).

There are other factors too that determine exactly how much LMI you might pay but generally speaking, the higher your loan amount and LVR, the higher your insurance cost.

For example, if you want to buy a $300,000 property and have saved a 15 per cent deposit, you would need to borrow 85 per cent of the property’s value, so your LVR is 85 per cent. While you’re borrowing more than 80 per cent of the value of the property, your loan amount and LVR is still considered relatively low so you would probably only need to pay the minimum LMI amount, which in this case would be around $8,000.

Or if you want to buy a $1 million property and have only saved a 5 per cent deposit, you would have an LVR of 95 per cent. As a result, your LMI amount would likely be calculated at a higher rate due to the loan amount and LVR being relatively high.

Don’t forget that you should factor into your finance calculations any extra fees that you’ll need to add onto the actual sale price, such as stamp duty, as this may affect your deposit amount and LMI requirements.

Make sure you contact your bank to discuss your personal situation, and keep saving to maximise your deposit and minimise your need for LMI.