One of the big questions for property buyers, especially first-home buyers, is: Should you pay Lenders Mortgage Insurance (LMI), or should you wait until you can save a bigger deposit? Before answering that, let’s break down what LMI is and why it matters.
What Is Lenders Mortgage Insurance (LMI)?
Lenders Mortgage Insurance is an insurance policy required by the bank when a buyer has less than a 20% deposit. Here’s the catch—LMI doesn’t protect the buyer. Instead, it protects the lender in case you don’t repay your mortgage.
For example, if you’re looking to buy a property worth $800,000 and have a 5% deposit of $40,000, you’ll need LMI. The cost? Around $31,939—nearly the same as your deposit.
The Arguments Against Paying LMI
Many experts advise avoiding LMI because it doesn’t protect you. They suggest continuing to save until you have a 20% deposit, claiming it’s the smarter financial move.
But does that really work in practice? Let’s look at the numbers.
The Reality of Waiting to Save a 20% Deposit
Saving a 20% deposit takes time—a lot of time. The average Australian buyer takes 8.1 years to save enough.
What happens during those 8.1 years? Property prices rise, and that brings two significant problems:
1. Rising Property Prices
Let’s rewind 8 years to 2016. In areas like the southern Brisbane corridor—Logan, Ormeau, or Pimpama—you could buy a brand-new house and land package for $400,000 to $500,000. Fast forward to today, and those same properties are now selling for $800,000 to $1 million.
If you’re waiting to save a bigger deposit, you’re not saving money—you’re losing buying power. The property you could afford today will cost much more in the future.
2. Deposit Creep
As property prices increase, so does the deposit you need to save.
For example:
- In 2016, a 20% deposit on a $450,000 property was $90,000.
- By 2024, that same property is worth $900,000, and the deposit needed is now $180,000.
Your savings will struggle to keep up with these rising costs. This is known as deposit creep, where you’re constantly chasing a moving target.
The Case for Paying LMI
Instead of waiting years and risking higher prices, paying LMI allows buyers to enter the market sooner. Yes, $31,939 in LMI sounds like a lot, but compare it to the potential increase of $400,000 or more in property value over 8 years.
Getting into the market sooner lets the property market do the heavy lifting for you. Rather than saving to keep pace with rising prices, you’re already building equity as your property appreciates in value.
The Bottom Line
For many buyers, paying LMI is a no-brainer. It’s not ideal to pay for something that protects the lender, but the alternative—waiting years and watching property prices soar—could cost much more in the long run.
If you’re serious about buying property, consider the long-term benefits of entering the market sooner. LMI might just be the key to making your property dreams a reality.
Thinking of buying? Speak to a property expert today to see if paying LMI makes sense for your situation.
