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More than two in five potential home buyers have admitted to not understanding what lenders mortgage insurance is, according to a new survey.
New data from Mortgage Choice and Core Data’s Evolving Great Australian Dream 2018 whitepaper found that 42.1 per cent of respondents were not sure what LMI was, yet a third said they would need to pay it to get into the property market.
Mortgage Choice CEO Susan Mitchell said that too many home buyers were unsure about what the insurance is.
“Our data found that a majority of home buyers are in the dark when it comes to lenders mortgage insurance and what it entails,” the CEO said.
Ms Mitchell said that less than a third accurately could say what LMI is and that many people were confused about who it protected.
“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 were most likely not to know what LMI was, with 47.3 per cent not sure; the 50-to-59 age group had the highest proportion of buyers who knew what LMI was, with only 40.75 per cent unsure.
Ms Mitchell said that it was a concern that most Australians were unsure what LMI was given the important role that a broker can play in property.
“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,” the CEO said.
Ms Mitchell said that young buyers particularly would need to pay LMI given the large deposit that would be needed to avoid it.
“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,” Ms Mitchell said.
Ms Mitchell added that she understood that LMI may seem like a fee to be avoided, but it did have an advantage for those wanting to get into the property market sooner.
“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.”
Ms Mitchell stressed the importance of first home buyers being aware of what was required in the purchase process.
“As property prices continue to relax, there has never been a better time for first home buyers to purchase. Therefore, it’s essential they have a clear understanding of LMI so that they know how it affects their ability to get into the market,” the CEO said.
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