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Low deposit loans up 33% as homebuyers jostle with rising prices

3 min read
15 Dec 2021

The number of properties purchased with lenders mortgage insurance increased 33% in the year to September 2021, despite government support schemes for first home buyers, the latest figures show.

A Compare the Market analysis of Australian Prudential Regulation Authority (APRA) data found Lenders Mortgage Insurance (LMI) was used to purchase 183,000 properties in the year to September 2021, compared with 137,000 across the same period in 2020.

The increasing number of ‘high risk’ loans mirrors record property growth over the past year.

LMI is a fee usually charged to borrowers with a deposit of less than 20%. The insurance protects home loan lenders against financial loss if the borrower is ever unable to afford repayments.

Depending on the size of the loan and the size of the deposit, LMI can add tens of thousands of dollars to your loan.

Compare the Market’s banking writer William Jolly said more people were willing to accept the sting just to get a foot on the property ladder.

“This increase in home buyers taking up lenders mortgage insurance isn’t surprising when you consider just how rapidly house prices have grown in a short space of time,” Mr Jolly said.

“Nationally, home prices have grown by 21% in the past 12 months – that’s more than the deposit people need to avoid LMI in most cases.

“It also shows that more and more people are choosing to take on larger mortgages, borrowing a greater percentage of the home’s value just to get into the market.”

Median dwelling values – November 2021

Capital CityMedian value – November 2021Annual growth – %
National average$686,33921.58%

Source: CoreLogic Home Value Index, 1 November 2021.

According to APRA, the LMI risks data excludes borrowers using various government home buying schemes, such as the First Home Loan Deposit Scheme (FHLDS).

There are also a number of lenders that are willing to accept a smaller deposit without charging LMI.

“With the growth we’ve seen over the past year, paying thousands to several tens of thousands of dollars for an LMI policy may have been worthwhile for some buyers thanks to capital gains,” Mr Jolly said.

“Whether the risk pays off for borrowers in the long-term will depend on the property and the serviceability of the loan.

“Many lenders now let you pay your LMI premium monthly as a part of your loan repayments, instead of having to pay it upfront.

“If you’re in the market to buy right now, weigh up your options or speak to a broker about whether it’s worth paying LMI, or if you’re better off continuing to save.

“It looks like price growth is starting to ease, so saving for a home deposit might be about to get a little bit easier.”

Cost of Lenders Mortgage Insurance (LMI) on house with median value – November 2021

Capital CityMedian valueWith a 5% depositWith a 10% depositWith a 15% deposit
National average$686,339$30,439.05$16,864.75$8,208.54

Figures based on Genworth’s LMI calculator. Assumes a 30-year loan term, owner-occupier mortgage for a non-first home buyer.

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Written by Sarah Orr

Sarah is an avid storyteller, passionate about improving financial literacy and helping Australians make informed choices with their money. Outside the newsroom, she enjoys cycling around Brisbane and snapping scenery on her camera.

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