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Finance brokers say the traditional notion of saving a 20% deposit is fast becoming outdated, and lenders mortgage insurance is now playing a strategic role for borrowers who want to get a foothold in the market.
Aaron Christie-David (pictured above left), founder at Atelier Wealth Mortgage Brokers, said the traditional way of thinking around saving for a 20% deposit is “becoming redundant” in the current market.
“As the property market outpaces income growth, overlaid with rampant inflation, the ability to save for a 20% deposit is not a reality,” Christie-David said.
He said on a national basis, house prices were increasing by about $1,000 per week.
“There is a high likelihood that their [buyers’] savings rate is not keeping pace with this increase in median house values, especially if they are also renting,” said Christie. “If a home buyer thinks they need a 20% [deposit], by the time they save this, the property they wanted would have increased and they’re chasing a moving target.”
Peter Kennedy (pictured above right), finance broker at Alecto Finance, agreed that people were struggling to raise a 20% deposit when the average home price had been rising faster than pay rises could keep pace.
“The higher costs of living are impacting people's capacity to save a lot of money quickly too,” Kennedy said.
A 2024 Home Buyer Sentiment Report from LMI provider Helia found that nearly 64% of homebuyers had a preference for paying LMI to secure a home sooner.
Among the first-home buyer segment, the preference was found to be stronger, with 67% considering LMI as a viable option to step onto the property ladder.
Fast-rising house prices are making the use of LMI a strategic consideration for many borrowers, some of whom are finding market entry simply “impossible,” Christie-David said.
“First-home buyers who don’t qualify for government exemptions or schemes or don’t have access to the bank of mum and dad acknowledge that LMI is the springboard they need to get into the property market,” he said.
Kennedy said when he commenced in the industry over 30 years ago, LMI was a “dirty word and a nasty cost”, but that had evolved through education of buyers and brokers.
“The use of LMI was more prevalent particularly in Sydney and Melbourne pre-pandemic as those markets grew faster than other major markets,” Kennedy said. “Since the pandemic the growth has increased, especially in South East Queensland. These are now the three major growth markets where saving a deposit is harder than ever.”
Christie-David said he was seeing a growing trend of first home buyers with high incomes who still found the 20% deposit requirement a barrier, and so they relied on LMI for assistance.
He added there were some “real sweet spots” for LMI, for example at the 12% deposit mark.
“The notion you need a 10% deposit is true, but then you need to add on the LMI premium, which then puts your total loan to value ratio over 90%,” he said.
This can increase a borrower’s interest rate or prevent them from making interest only repayments.
“With a 12% deposit, you can capitalise your LMI premium and stay under the 90% loan to value ratio, which is one example of being more strategic with the right client,” Christie-David said.
Kennedy said borrowers who wanted to get into the market “in solid areas with good growth” were good candidates for LMI, as the insurance product could speed up that process for them.
“I'm also having discussions with rentvestors who rent for lifestyle and invest in property; LMI makes this easier to do so. It's become a cost of buying like stamp duty,” Kennedy said.
There is also a growing segment of savvy investors who are using LMI to split their deposits across two investment properties, according to Christie-David.
“Rather than buying one investment property with a 20% deposit they will split their deposit in two and purchase a second investment property,” Christie-David said. “They see LMI as a mechanism to get into the market to build their investment property portfolio.”
There are some cases where brokers do not see recommending LMI as an advantage for borrowers.
Kennedy said examples included when borrowers had a strong saving capacity outpacing price growth, or those looking at low growth areas where waiting might not impact the purchase price.
“A family member could also assist with using the equity in their home under a limited guarantee, or may also be able to loan the buyer some of the 20% deposit,” he said.
Some borrowers may also benefit from other product options as they approach a 20% deposit, such as lenders who choose to waive LMI if borrowers have a 15% deposit.
“There is also a lender who offers no LMI with a 10% deposit; this product has a higher interest rate though, so it’s ‘six of one half a dozen of the other’ as the saying goes,” Christie-David said.
Brokers say recent changes to LMI, such as enabling borrowers to pay LMI monthly, or giving parents the ability to pay it out for them, would see the product playing a continued role into the future.
Helia’s 2024 report found that 10% of first home buyers were already reporting receiving support from their parents to pay the LMI fee so that they could get into a home.
“Given LMI is an insurance product, it’s not considered to be innovative: but I absolutely think otherwise,” Christie-David said. “The ability to pay LMI monthly until you can get your property revalued to be at an 80% loan to value ratio is a great alternative to the upfront fee.”
The waiving of LMI in certain postcodes and for certain industries like medical, accounting and legal is also a great innovation for lenders to attract their ideal clients, he said.
“The savvier homebuyers who embrace LMI and can get into the property market will be rewarded with taking action rather than the old school way of thinking,” said Christie-David.
