‘Unavoidable’ LMI adding up to $33k to home loan costs
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Buyers unable to front-up a 20% deposit for a home loan are paying up to an estimated $33,000 extra on an insurance product designed to protect the bank’s bottom line from mortgage defaults.
Lenders usually require borrowers to pay for Lenders Mortgage Insurance (LMI) if the borrower is buying a home with a deposit of less than 20%.
However, according to a Mozo survey, 84% of Australians saving for a home deposit can’t afford to save the 20% required to avoid paying for LMI.
This is due in-part to a property market where the median price has exploded by 50% over the past five years, according to data from the Australian Bureau of Statistics (ABS).
The median price of a residential property in Australia now sits at $973,300, up from a relatively cheap $649,300 in June 2019.
To qualify for a home loan on the median priced property without paying LMI, you would need to save up a 20% deposit of $194,660 – a difficult feat, considering the cost of living and its squeeze on household budgets.
Looking at property prices across Australia, the figures paint a worrying picture for not just the size of the median 20% deposit, but the cost of LMI for those who can’t save one up.
| Location | Residential Property Price (mean) | 20% Home Loan Deposit Needed | LMI fee for only a 10% Deposit |
| Australia | $973,300 | $194,660 | $23,916 |
| New South Wales | $1,222,000 | $244,400 | $32,999 |
| Victoria | $900,300 | $180,060 | $22,122 |
| Queensland | $885,400 | $177,080 | $21,756 |
| South Australia | $800,400 | $160,080 | $19,667 |
| Western Australia | $816,000 | $163,200 | $20,050 |
| Tasmania | $672,600 | $134,520 | $16,527 |
| North Territory | $538,000 | $107,600 | $10,377 |
| Australian Capital Territory | $953,900 | $190,780 | $23,439 |
| Source: Mozo/ABS. LMI calculations for an owner-occupier home loan, excluding stamp duty costs and first home buyer discounts, based on a loan term of 30 years or less. LMI calculations conducted via Helia | |||
With no signs of slowing down any time soon, property price rises will continue to make it harder to save a 20% deposit, according to Mozo finance expert Rachel Wastell.
“As housing prices continue to rise, avoiding LMI has become an even greater challenge.
“The majority of first home buyers in Australia are now likely to face hefty LMI fees that add tens of thousands of dollars to the cost of a home loan – and that’s before you take into account the additional interest costs and other upfront costs, including stamp duty and conveyancing fees,” she said.
Lack of consumer choice and competition in the LMI space
The kicker? Unlike other insurance that consumers can compare, borrowers don’t have a choice over which LMI provider their lender uses. This means you can’t shop around for the best deal and are instead subject to pre-negotiated rates between lenders and LMI providers.
Even two identical borrowers with the same loan-to-value ratio (LVR) and loan amount, who purchase LMI through the same insurance provider could pay a different premium if their home loans are with a different lender that has an alternative agreement with the LMI provider.
There are also only a handful of providers who sell LMI in Australia, including major Australian banks and multinational insurance groups:
- QBE (previously PMI)
- Helia (Genworth)
- AIC (American Insurance Company)
- WBC LMI (Westpac)
- ANZ LMI (ANZ)
- STG LMI (St George).
Without healthy competition which, according to the Australian Competition and Consumer Commission (ACCC), “leads to lower prices and more choice for consumers”, LMI will continue to be a big, unavoidable cost on top of an already expensive product: housing.
“Understanding how much interest you will pay over the course of your loan is critical. If you can’t meet the 20% deposit threshold, shop around for the lowest home loan rates to try and help offset the unavoidable cost of LMI,” said Wastell.
“Even a half a percentage point difference on a six hundred thousand dollar loan can equate to tens of thousands of dollars in interest saved over a 25 year loan term, which could end up offsetting the cost of LMI.”
* WARNING: This comparison rate applies only to the example or examples given. Different amounts and terms will result in different comparison rates. Costs such as redraw fees or early repayment fees, and cost savings such as fee waivers, are not included in the comparison rate but may influence the cost of the loan. The comparison rate displayed is for a secured loan with monthly principal and interest repayments for $150,000 over 25 years.
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