St.George offers $1 LMI for first home buyers

St.George offers $1 LMI for first home buyers

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 
Property value  $650,000  $650,000  $0
Deposit $130,000 $97,500 $32,500
Loan size $520,000 $552,500 $-32,500
Rate 2.64% 2.69% -0.05%
Monthly repayments $2093 $2238 -$145
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. 

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Learn more about home loans

What is a low-deposit home loan?

A low-deposit home loan is a mortgage where you need to borrow more than 80 per cent of the purchase price – in other words, your deposit is less than 20 per cent of the purchase price.

For example, if you want to buy a $500,000 property, you’ll need a low-deposit home loan if your deposit is less than $100,000 and therefore you need to borrow more than $400,000.

As a general rule, you’ll need to pay LMI (lender’s mortgage insurance) if you take out a low-deposit home loan. You can use this LMI calculator to estimate your LMI payment.

What are the pros and cons of no-deposit home loans?

It’s no longer possible to get a no-deposit home loan in Australia. In some circumstances, you might be able to take out a mortgage with a 5 per cent deposit – but before you do so, it’s important to weigh up the pros and cons.

The big advantage of borrowing 95 per cent (also known as a 95 per cent home loan) is that you get to buy your property sooner. That may be particularly important if you plan to purchase in a rising market, where prices are increasing faster than you can accumulate savings.

But 95 per cent home loans also have disadvantages. First, the 95 per cent home loan market is relatively small, so you’ll have fewer options to choose from. Second, you’ll probably have to pay LMI (lender’s mortgage insurance). Third, you’ll probably be charged a higher interest rate. Fourth, the more you borrow, the more you’ll ultimately have to pay in interest. Fifth, if your property declines in value, your mortgage might end up being worth more than your home.

How much deposit will I need to buy a house?

A deposit of 20 per cent or more is ideal as it’s typically the amount a lender sees as ‘safe’. Being a safe borrower is a good position to be in as you’ll have a range of lenders to pick from, with some likely to offer up a lower interest rate as a reward. Additionally, a deposit of over 20 per cent usually eliminates the need for lender’s mortgage insurance (LMI) which can add thousands to the cost of buying your home.

While you can get a loan with as little as 5 per cent deposit, it’s definitely not the most advisable way to enter the home loan market. Banks view people with low deposits as ‘high risk’ and often charge higher interest rates as a precaution. The smaller your deposit, the more you’ll also have to pay in LMI as it works on a sliding scale dependent on your deposit size.

Will I have to pay lenders' mortgage insurance twice if I refinance?

If your deposit was less than 20 per cent of your property’s value when you took out your original loan, you may have paid lenders’ mortgage insurance (LMI) to cover the lender against the risk that you may default on your repayments. 

If you refinance to a new home loan, but still don’t have enough deposit and/or equity to provide 20 per cent security, you’ll need to pay for the lender’s LMI a second time. This could potentially add thousands or tens of thousands of dollars in upfront costs to your mortgage, so it’s important to consider whether the financial benefits of refinancing may be worth these costs.

Does Australia have no-deposit home loans?

Australia no longer has no-deposit home loans – or 100 per cent home loans as they’re also known – because they’re regarded as too risky.

However, some lenders allow some borrowers to take out mortgages with a 5 per cent deposit.

Another option is to source a deposit from elsewhere – either by using a parental guarantee or by drawing out equity from another property.

How do I take out a low-deposit home loan?

If you want to take out a low-deposit home loan, it might be a good idea to consult a mortgage broker who can give you professional financial advice and organise the mortgage for you.

Another way to take out a low-deposit home loan is to do your own research with a comparison website like RateCity. Once you’ve identified your preferred mortgage, you can apply through RateCity or go direct to the lender.

How can I avoid mortgage insurance?

Lenders mortgage insurance (LMI) can be avoided by having a substantial deposit saved up before you apply for a loan, usually around 20 per cent or more (or a LVR of 80 per cent or less). This amount needs to be considered genuine savings by your lender so it has to have been in your account for three months rather than a lump sum that has just been deposited.

Some lenders may even require a six months saving history so the best way to ensure you don’t end up paying LMI is to plan ahead for your home loan and save regularly.

Tip: You can use RateCity mortgage repayment calculator to calculate your LMI based on your borrowing profile

What is Lender's Mortgage Insurance (LMI)

Lender’s Mortgage Insurance (LMI) is an insurance policy, which protects your bank if you default on the loan (i.e. stop paying your loan). While the bank takes out the policy, you pay the premium. Generally you can ‘capitalise’ the premium – meaning that instead of paying it upfront in one hit, you roll it into the total amount you owe, and it becomes part of your regular mortgage repayments.

This additional cost is typically required when you have less than 20 per cent savings, or a loan with an LVR of 80 per cent or higher, and it can run into thousands of dollars. The policy is not transferrable, so if you sell and buy a new house with less than 20 per cent equity, then you’ll be required to foot the bill again, even if you borrow with the same lender.

Some lenders, such as the Commonwealth Bank, charge customers with a small deposit a Low Deposit Premium or LDP instead of LMI. The cost of the premium is included in your loan so you pay it off over time.

How much can I borrow with a guaranteed home loan?

Some lenders will allow you to borrow 100 per cent of the value of the property with a guaranteed home loan. For that to happen, the lender would have to feel confident in your ability to pay off the mortgage and in the security provided by your guarantor.

How do I know if I have to pay LMI?

Each lender has its own policies, but as a general rule you will have to pay lender’s mortgage insurance (LMI) if your loan-to-value ratio (LVR) exceeds 80 per cent. This applies whether you’re taking out a new home loan or you’re refinancing.

If you’re looking to buy a property, you can use this LMI calculator to work out how much you’re likely to be charged in LMI.

How much are repayments on a $250K mortgage?

The exact repayment amount for a $250,000 mortgage will be determined by several factors including your deposit size, interest rate and the type of loan. It is best to use a mortgage calculator to determine your actual repayment size.

For example, the monthly repayments on a $250,000 loan with a 5 per cent interest rate over 30 years will be $1342. For a loan of $300,000 on the same rate and loan term, the monthly repayments will be $1610 and for a $500,000 loan, the monthly repayments will be $2684.

What is a loan-to-value ratio (LVR)?

A loan-to-value ratio (otherwise known as a Loan to Valuation Ratio or LVR), is a calculation lenders make to work out the value of your loan versus the value of your property, expressed as a percentage.   Lenders use this calculation to help assess your suitability for a home loan, and whether you need to pay lender’s mortgage insurance (LMI). As a general rule, most banks will require you to pay LMI if your loan-to-value ratio is 80 per cent or more.   LVR is worked out by dividing the loan amount by the value of the property. If you are looking for a quick ball-park estimate of LVR, the size of your deposit is a good indicator as it is directly proportionate to your LVR. For instance, a loan with an LVR of 80 per cent requires a deposit of 20 per cent, while a 90 per cent LVR requires 10 per cent down payment. 

LOAN AMOUNT / PROPERTY VALUE = LVR%

While this all sounds simple enough, it is worth doing a more accurate calculation of LVR before you commit to buying a place as there are some traps to be aware of. Firstly, the ‘loan amount’ is the price you paid for the property plus additional costs such as stamp duty and legal fees, minus your deposit amount. Secondly, the ‘property value’ is determined by your lender’s valuation of the property, not the price you paid for it, and sometimes these can differ so where possible, try and get your bank to evaluate the property before you put in an offer.

How do I save for a mortgage when renting?

Saving for a deposit to secure a mortgage when renting is challenging but it can be done with time and patience. If you’re on a single income it can be even more difficult but this shouldn’t discourage you from buying your own home.

To save for a deposit, plan out a monthly budget and put it in a prominent position so it acts as a daily reminder of your ultimate goal. In your budget, set aside an amount of money each week to go into a savings account so you can start building up the ‘0’s’ in your account.  There are a range of online savings accounts that offer reasonable interest, although some will only off you high rates for the first few months so be wary of this.

If you aren’t able to save a large deposit, you can consider ways of entering the market that require small or no deposits. This can include getting a parent to act as guarantor for your home loan or entering the market with an interest only loan.

Does Australia have no cost refinancing?

No Cost Refinancing is an option available in the US where the lender or broker covers your switching costs, such as appraisal fees and settlement costs. Unfortunately, no cost refinancing isn’t available in Australia.