Caught in a Costly Catch-22: Over 5 in 6 Aussies saving for a house deposit (84%) can’t sidestep hefty LMI fees

New research from leading financial comparison site Mozo reveals a daunting reality: 84% of Australians saving for a home loan deposit cannot afford the 20% needed to avoid the costly burden of Lenders Mortgage Insurance (LMI). 

With the median property price in Australia now sitting at $973,300, prospective buyers would need to save $194,660 to meet the 20% deposit requirement, a figure made even more difficult by rising living costs, which continue to pressure household budgets.

“As housing prices continue to rise, avoiding LMI has become an even greater challenge,” says Rachel Wastell, personal finance expert at Mozo. 

“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.”

“Plus, unlike other insurance products that consumers can compare to get the best deal, LMI is chosen by the lender. This means borrowers have little choice but to pay the fee they’re given.”

What Do Australians Think Is Achievable When Saving For A House Deposit?

According to Mozo research*, there’s a significant gap between the traditional 20% deposit expectation when buying a home, and what’s realistically achievable in today’s property market.

• 47% believe they can only manage a 5% deposit.
• 29% think they can save enough for a 10% deposit.
• 8% believe they can pull together the funds for a 15% deposit.
• 12% feel confident in saving a 20% deposit.
• Just 2% believe they can save a 30% deposit.
• And another 2% are confident they could manage a 50% deposit.

A Quarter Of A Million Dollar Deposit Is No Mean Feat

“Mozo’s findings highlight how the traditional expected deposit amounts are no longer realistically achievable for the majority of Aussie savings for a home,” stresses Wastell.

“The new financial reality is that as median property prices approach the million dollar mark, the deposits needed to avoid LMI far exceed six figures, which in a cost of living crisis is no mean feat.”

According to the latest median dwelling price data the median property price now stands at $973,300, up from $949,400 in December last year and $649,300 in June 2019. That’s a whopping 50% increase in the median price of residential properties in just five years.

“This is an increasingly difficult task when you look at the rising cost of living that’s creating additional financial pressures, especially for those living in NSW, who need to save almost $250,000 to avoid LMI,” adds Wastell.

Looking at the mean property prices across Australia, the required 20 percent deposit, and the estimated LMI for those who can only afford to save 10 percent, the figures paint a worrying picture.

For borrowers  only able to save up to 10% of these rising property values, LMI costs could add tens of thousands of dollars to the overall cost of a home loan. While there are opportunities for First Home Buyers to avoid LMI, property values must be under $750,000 to qualify for LMI exemptions.

“This 50% jump in the median price of residential properties over the past five years now means some prospective buyers are scrambling to find a quarter of a million dollars to sidestep LMI,” Wastell says.

“It’s like savers are caught in a catch-22, you can’t afford the 20 percent deposit, but if you don’t save it you’ll be forking out tens of thousands of dollars extra.”

No Choice When It Comes to LMI

This additional expense is further complicated by a lack of competition in the LMI market. When it comes to choosing an LMI provider, borrowers do not have the same choices they do when they choose a mortgage broker or lender.

As the lender arranges LMI on their behalf, the cost is pre-determined based on negotiations between the Lender and the LMI provider. 

However, LMI premiums can still vary even between lenders who use the same LMI provider, meaning two borrowers with the same LVR and loan amount could face different LMI costs based on their lender’s agreement with the LMI provider.

In Australia, only a handful of LMI providers offer this type of insurance:

• QBE (previously PMI)
• Helia (Genworth)
• AIC (American Insurance Company)
• WBC LMI (Westpac)
• ANZ LMI (ANZ)
• STG LMI (St George)

“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,” says 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.”

“It’s also important for borrowers to remember that LMI is not refundable or transferable.” 

“So, if they decide to refinance with an LVR of more than 80%, the LMI does not transfer over, and they will need to pay the LMI fee again to their new lender.”

*Notes:   Mozo commissioned a nationally representative survey of 2,129 Australians aged 18 years and over, with information collected between 19 July and 5 August 2024  via Researchify.