For many buyers, taking out Lenders Mortgage Insurance (LMI) has enabled them to enter the property market sooner than they otherwise could. But the option is not for everyone, with one buyer saying she regrets using it.
A year ago, Dave and Georgina Adams, both 33, were eager to buy a fixer-upper in inner-west Melbourne before starting their family. With homes costing between $900,000 and $1 million, they were scrambling to save a 20% deposit – nearly $200,000 – before prices climbed too high.
"The market in the area was hot and we really wanted to get in sooner rather than later," Mr Adams explained.
Dave and Georgina Adams bought their home using Lenders Mortgage Insurance. Picture: Supplied
Then his mortgage broker provided an alternative option.
"He suggested we could use Lenders Mortgage Insurance [LMI] to purchase at a lower deposit point to get into the market sooner at a lower price, and even save some cash for renovations."
They took the plunge, purchasing their first family home with the help of LMI and starting renovations before welcoming their first child, Oliver.
While LMI has meant higher repayments for the couple, Dave described them as "manageable," despite interest rate rises, though he said they've had to be cautious with their spending.
"Taking out LMI was definitely the right decision for us. We probably bought the last house in that particular pocket that would have been within our means. And regardless of higher repayments, I think we would still be chasing an increased number anyway due to rising house prices," he said.
"We're looking long term. It was more about setting myself and my wife up for the future."
More buyers opting for LMI
Increasing house prices, interest rates and cost-of-living expenses mean that 76% of first-home buyers are now trying to purchase property without a 20% deposit, according to research by LMI provider Helia and CoreData.
In 2024, 55% of first-home buyers used LMI, up from 35% in 2023.
Sydney-based broker James Algar from Mortgage Choice has noticed an uptick in LMI usage since the pandemic, driven by a fear of missing out (FOMO).
Mortgage Choice mortgage broker James Algar. Photo: Britta Campion
"When house prices accelerated through 2020 and 2021, there was a frenzy of people who realised they wouldn't be able to save the 20% they needed so they threw that strategy out of the window and tried to get into the market sooner," Mr Algar said.
"Over the past couple of years, the number of mortgage-insured loans I've written may have increased by up to 10%."
Buyers in less affordable areas were more likely to take out mortgage-insured loans than those in wealthy pockets, he added.
'I wouldn't do it again'
Melbourne-based Milly*, 32, took out LMI when buying her first home in 2017. With a $35,000 deposit, she took out a $450,000 loan plus an additional $17,000 for LMI.
While the move enabled her to get into the market quicker and then pocket $150,000 in profit after selling in 2019, she still regrets using LMI due to the extra interest costs involved.
"The LMI was included in our mortgage, so we incurred extra interest costs in addition to the $17,000 LMI," she said.
"If I could do it again, I would probably try to save the deposit required to avoid LMI."
How does LMI work?
LMI is designed to protect your lender and the LMI provider if you default on your home loan and the sale doesn't cover the debt.
It can be helpful for those struggling to save a 20% deposit to enter the market sooner, but the trade-off is higher expenses.
These costs vary depending on your deposit, property value and lender. As a guide, a 15% deposit on a $500,000 property might cost around $5,000 in LMI; a 5% deposit on a $1 million property could cost nearer $50,000. Plus a larger loan results in higher repayments – at least temporarily.
Is LMI worth it?
Senior economist at PropTrack Paul Ryan advised evaluating your financial situation, consulting a broker and doing the sums.
Calculate potential property price increases during the time it would take you to save a full 20% deposit and compare this to the cost of LMI and additional repayments, along with rent during the saving period, he suggested.
PropTrack senior economist, Paul Ryan said the decision to take out LMI depended on which market you were buying into. Picture: Supplied.
"If it does enable you to get into the market sooner when prices are rising quickly, that can end up being a positive. But everyone needs to consider their own financial circumstances."
The urgency of taking out LMI often depends on the market you're looking to buy in.
"In somewhere like Perth where prices have grown 20% over the past year, you can see why first-time buyers would be pretty desperate to get into the market by any means. But if you look at markets like Melbourne that have been pretty flat, there may be less urgency," Mr Ryan added.
Is taking out LMI likely to become more common?
The LMI market is evolving, with lenders adapting to higher property prices. New players now offer second mortgages rubber stamped by the primary lender, which allow buyers to avoid LMI.
Some lenders are widening exemptions from LMI, enabling buyers to borrow homes with a loan-to-value ratio (LVR) of more than 80% without insurance.
While those in the legal, medical and accounting industries have been exempt for some time, ANZ recently slashed LMI for high-value suburbs considered low-risk – a move that has been criticised for preferencing wealthier buyers.
Some of Australia's most expensive suburbs, including Sydney's Point Piper, were exempt from LMI. Picture: realestate.com.au
"There's some significant disruptors coming into the LMI world so it will be interesting to see what happens in the next 12 to 18 months," said Mr Algar.
"We're seeing more innovation in terms of banks assessing risk," Mr Ryan added. "So potentially, there's more first-home buyers – and higher-income first-home buyers in particular – who may be able to take out higher LVR loans without having to purchase LMI."
However, higher prices, interest rates and rents may lead more people to consider the option, Mr Ryan added.
"I wouldn't be surprised if more people feel they need to take out LMI to get into the current market. And some might want to get in before perceived price increases off the back of expected interest rate falls next year."
* not her real name.
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