Q. It has taken me three years to save up $30,000 for a 10 per cent deposit on a property worth $300,000. Should I save for a few more years to get a lower LVR or buy now and run the risk of paying LMI?
A. This is a question that borrowers we speak to face almost every day. Lenders Mortgage Insurance is protection for a lender which will allow a borrower to enter the property market sooner rather than later. There is no “risk” associated with mortgage insurance; it is a cost that should be quoted to you well prior to you entering into the contract. The end cost to a borrower depends on a number of factors, including the state in which they are purchasing the property, the mortgage insurance firm your lender uses as well as a number of other variables. As a rough guide, the cost for a $270,000 loan against a $300,000 property would be around $3,000 to $3,400.
The risk with the question to buy now or later really comes down to what you think will happen to property prices between now and when you could buy with a larger deposit. Say it will take you another 3 years to save a 20% deposit, what can happen to property prices in the meantime may well make the $3,000 look like a relatively small cost. Most people enter the property market not thinking it will go backwards, so let’s assume property prices increase by 5% per year for the next three years. That means the property that is worth $300,000 now would be worth almost $350,000 in three years time, an additional cost of almost $50,000 based on reasonably conservative price growth assumption.
Yes mortgage insurance is an additional cost, and I do not believe in people purchasing beyond their means, however, if property prices increase, the risk can be in waiting.
This is one of the age-old property investor questions: new versus old, along with apartment versus stand alone house. Despite many accountants and property advisors recommending stepping away from older properties, adding some to your investment portfolio still has many benefits.
Mark Bouris, Chairman, Yellow Brick Road
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