What can you buy for one dollar? A fun size chocolate bar? A scratchie? Half a kilo of supermarket-brand flour? Now the almighty dollar will also be able to cover the cost of Lenders Mortgage Insurance (LMI) for first home buyers taking out a home loan from St.George Bank with a 15 per cent deposit.
From 13 July 2020, St.George Bank is offering to let first home buyers who are borrowing up to $850,000 for a property worth up to $1 million take out LMI for the princely sum of just $1.
- What is LMI? Lenders Mortgage Insurance is typically required for any home loan with a deposit of less than 20 per cent. LMI covers the lender (and not the borrower) against the risk of the borrower defaulting on their mortgage. Most lenders pass the cost of the LMI policy on to the borrower – the lower your deposit, the more you may have to pay in LMI charges.
To put this in perspective, according to the RateCity LMI calculator, applying for a $1 million home loan with a 15 per cent deposit ($150,000) would typically require you to pay approximately $11,305 in LMI charges.
According to St.George, this offer was introduced partially to account for how Australian first home buyers are re-evaluating their home ownership plans following the COVID-19 pandemic.
“Australians have spent more time at home than ever before during the COVID-19 restrictions, and we are seeing a bigger trend in how the nation is re-evaluating their current living situation. For example, three quarters of people would now prefer to live in a house over an apartment.”
“First home buyers are calling for new ways to achieve their home ownership dreams sooner, and this option is designed to help make that goal within closer reach, particularly with the added benefit of a record low interest rate environment.” - St.George general manager, Ross Miller
The introduction of this offer follows several weeks of Australian banks, including St.George and its parent company Westpac, slashing fixed and variable interest rates as they compete more and more fiercely for business from Australia’s home buyers, many of whom have taken a pandemic-related financial hit.
This offer is available now from St.George, and it is understood it should also be available from affiliated banks BankSA and Bank of Melbourne by the end of July 2020.
How could a smaller deposit affect your home loan?
Even without considering the potential cost of LMI, a smaller deposit can make a big difference to the cost of a home loan. For example, if you used the St.George offer to buy a $650,000 property with a 15 per cent deposit instead of a 20 per cent deposit, you would need to pay $32,500 less upfront. That’s less money you have to save, so you can potentially buy your first home sooner, before property prices can change further.
The government’s First Home Deposit Scheme (FHDS) also lets borrowers apply for home loans with smaller deposits, going as low as just five per cent. That said, there are a limited number of places in this scheme, and there are many other terms and conditions to consider, such as both partners having to be first home buyers to apply for a joint home loan under the scheme, while the St.George offer only requires one partner to be a first home buyer.
However, it’s also important to remember that while a smaller deposit means paying less up front for a home loan, it also means borrowing more money to buy your house. A larger loan means higher repayments, so your mortgage may cost more, both from month to month an in total over the long term
To use the earlier example of buying a $650,000 property with a 15 per cent deposit instead of a 20 per cent deposit, you would need to pay $32,500 less upfront. However, your mortgage repayments would be $145 extra a month and you would pay $19,820 in extra interest to the bank over 30 years.
Monthly repayments and interest paid on a $650K property
|20% deposit||15% deposit||Difference|
|Total interest paid over 30 years||$233,364||$253,184||-$19,820|
This is based on taking out St George’s basic home loan at a rate of 2.69 per cent with a 15 per cent deposit for an owner-occupier paying principal and interest, compared to a 2.64 per cent rate with a 20 per cent deposit. Calculations are based over 30 years and do not include fees or stamp duty. Assumes LMI is $0.
If you can afford to save up a larger deposit up front, you may be able to put yourself in a position to pay less for your mortgage in the long run. But paying a lower deposit with the help of banks, the government, or a guarantor may make it much easier to take your first steps onto the property ladder. Be sure to compare your options before making a decision, and if you’re not sure what may be right for you, consider getting help from a mortgage broker or other finance professional.