Brokers are being encouraged to tell their clients about Lender’s Mortgage Insurance (LMI), as new research suggests 2 in 5 prospective borrowers do not understand what it is.
Mortgage Choice and CoreData’s new Evolving Great Australian Dream 2018 whitepaper found 42.1% of respondents said they were not sure what LMI was, yet 32% said they would need to pay it in order to get into the property market.
Only 32.1% of prospective buyers accurately stated that LMI is designed to protect the lender if a borrower can’t repay their mortgage.
Just over 8% of respondents thought LMI protected the borrower, while 17.6% believed it protected both the borrower and the lender.
Buyers aged 29 and under were the most likely not to know what LMI was, while the 50 to 59 age group had the highest proportion of buyers who knew what LMI was.
Mortgage Choice Chief Executive Officer Susan Mitchell said it was concerning that such a large proportion of Australians had either a limited or no understanding of LMI and that mortgage brokers can play an educational role for borrowers.
She added, “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% of the purchase price.
“The reality is that saving for a home deposit is a major challenge for first home buyers and this has been the result of strong price growth over the last few years.
“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% deposit and they would still need to have additional funds to cover costs such as legal fees and stamp duty.
“That is quite large sum to save and it only increases if a buyer is looking in cities such as Sydney and Melbourne.
“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.”
Mitchell said first home buyers could avoid LMI if they were able to receive some sort of financial boost or a have a guarantor on their loan, but brokers need to be able to explain all the options.
The research also found that 44.8% of women did not to understand what LMI was, compared to 37.35% of men.
On a state by state comparison, Victoria with 46% had the highest proportion of buyers who did not know what LMI was, followed by Queensland with 40% and Western Australia with 39.6%. NSW buyers topped the states when it came to correctly defining LMI at 38.8%.
From Australian Broker