Capitalisation - Don't pay LMI upfront
Creeping rental prices and increased lifestyle costs are making saving for a deposit difficult for a large number of Australians. But there is a smart technique called capitalisation that first time buyers are adopting to leapfrog years of deposit saving and turn their dreams of home ownership into a reality.
LMI premiums are payable in two ways, an up-front fee, or by capitalisation. Capitalising your premium essentially means adding it to the total loan amount, and paying it off in regular installments with your homeloan.
The 2009 Mortgage Trends Report highlighted that this was the most common way of paying LMI, with 58% of respondents to the survey opting for the monthly option. Depending on the amount you are borrowing and your deposit, in some cases, capitalising the LMI premium can be an additional $30 per month, the cost of one take-away pizza, a relatively small sacrifice to make to own your own home.
How does capitalisation work?
Newlyweds Tim and Erica are battling to save a deposit for their home, and currently spend approximately 32% of their combined monthly salary on rent.
Paying rent is putting a real strain on their ability to save a deposit and after speaking with their mortgage broker, Tim and Erica learn they can secure a mortgage for up to 95% of the value of the property they hope to buy if they take out LMI.
Using the $20,000 they have saved to date for a deposit, as well as their $14,000 First Home Buyers Grant, Tim and Erica can comfortably meet the other commitments associated with their mortgage - such as solicitor and application fees.
Keen not to miss out on the property they've decided to purchase, Tim and Erica's broker advises that they can capitalise their LMI - which means adding the cost of the premium to their mortgage.
Purchasing their new home for $350,000, with a mortgage of $316,000 the monthly repayments on their 30-year mortgage (rate 7.5%) comes to approximately $2,307.
The LMI premium on their $316,000 mortgage comes to approximately $8,349. Should Tim and Erica capitalise their LMI it will increase their monthly mortgage repayments by $58, taking the total monthly mortgage repayment to $2,366.
Please note that pricing may vary between lenders. Please contact your lender for more information on product fees.