LMI a solution for those who struggle building a deposit
Saving a deposit remains a massive stumbling block for first home buyers, with the path to purchasing more stressful than it’s ever been, according to a new industry study.
The 2023 Helia Home Buyer Sentiment Report reveals 85% of those surveyed said it was harder than ever to buy their first property.
The report, based on research commissioned by lenders mortgage insurance provider Helia, and conducted by CoreData with information from 3,001 homebuyers, found an overwhelming majority of home hunters, or 88%, found the journey to buying their first property stressful.
Brokers have key role to play in first property purchase, says Helia
Discussing the latest Helia Home Buyer Sentiment Report, Helia chief commercial officer - LMI, Greg McAweeney (pictured below) said he wasn’t surprised to learn first home buyers were stressed.
McAweeney said in general terms there was a lack of financial literacy across the community, and this along with the high cost of property, and recent interest rate rises, had left first-home buyers in particular overwhelmed.
He said mortgage brokers had become a “trusted voice” with a unique and vital role to play in guiding and educating people on the pathways to homeownership.
“This positions mortgage brokers as being able to provide valuable support, with four in five home buyers, (or 79%) likely to use a broker to obtain a loan for their property,” McAweeney said.
“The report emphasises the important role brokers play for aspiring homebuyers helping to cut through the complexity in the purchasing process providing valuable support and reliable, trusted advice and information.”
He said there was also pressure on brokers to stay abreast of the changing financial landscape and the range of products in the market.
“Even though they're so motivated to buy, 30% of them [buyers] are unaware of alternative financial pathways to get on the property ladder.”
The Helia report identified a number of key areas where first home buyers needed assistance including determining the right loan for their needs (39%), determining their borrowing capacity (37%), applying for a loan (36%), getting pre-approval for the loan (35%) and determining what they can afford to buy (34%).
Read more: What is the first home buyer assistance scheme?
McAweeney said finding a deposit only added to the stress and 89% of those surveyed said it was increasingly difficult to save for a deposit.
“The 20% home deposit feels like it's almost a pipe dream now for first-time buyers in particular.”
He said it would take a couple in Sydney 13 years to save a 20% deposit for a house, and eight years for an apartment.
The report highlighted that deposit sizes are shrinking year after year, with only 20% of first home buyers saving a 20% deposit in 2023, compared to 41% in 2019.
The research also shows that more than a third of first home buyers are proposing to save a deposit of between 5% and 9%, which falls short of the usual 20% deposit required by most lenders.
McAweeney said this decline in deposit sizes may force aspiring home buyers to delay their decision to buy a home until they had saved the full 20% deposit, which could take several years and contribute to longer periods of renting.
Helia lenders mortgage insurance helps buyers climb property ladder
Some potential homebuyers are looking at alternative ways to overcome the barriers around saving a 20% deposit including financing at <80% LVR with the help from LMI, with 60% likely to use LMI to bridge the deposit gap, according to the report.
“While LMI adds an extra cost to your home loan, it can help you achieve getting into homeownership sooner,” said McAweeney.
Other pathways to homeownership being considered by borrowers include support from various government schemes (50%), rent to own (52%), deposit gap loans (40%) and the bank of mum and dad (30%).
Broker explains the advantages of LMI
Mortgage broker and director of Peter Kennedy Consulting (Alecto Finance), Peter Kennedy said LMI should be positioned as an enabler for homebuyers to get onto the property ladder and break free from the rental cycle.
“Whilst the prospect of an additional fee can be seen as frustrating for homebuyers, the property market may have moved further out of reach by the time the 20% deposit is saved,” Kennedy said.
“Also, the equity you could build by getting into the property sooner, could over time outweigh the cost of the LMI fee. There are so many different ways to pay for LMI now, including upfront premium fee, capitalising the LMI fee into your loan or a monthly LMI fee option.
“With housing affordability and increasing property prices challenging people to rethink what homeownership looks like, mortgage brokers should be well versed in a range of alternative strategies to help their clients achieve their home ownership dreams.”
How LMI from Helia helped couple buy home
First home buyer Mitch Keough and his partner Amelia Perry (pictured above with daughter Charlotte) began looking for a home in earnest in late 2019 after moving into a rental unit in Sydney’s eastern suburbs,
“We slowly began attending open homes around Greater Sydney and the Blue Mountains and began speaking to both brokers and banks to understand our best way forward in securing a mortgage,” Keough said.
“We ultimately landed on Bendigo Bank as our preferred lender as I had recently changed roles within the same industry and it had some appealing mortgage products and rates for us.”
Keough said they had Initially intended to buy a property using the First Home Buyer Deposit Scheme, with a 5% deposit.
“Unfortunately, we quickly found ourselves being priced out in auctions, faced with plenty of competition, both young couples like us trying to enter the market, and downsizers with cash.
“Deflated, we decided in the end to forgo the deposit scheme and upped our ceiling for our ideal purchase price.”
By 2021, the couple had identified south-eastern Sydney as their preferred area to buy and at the time the prices were reasonable, with a good amount of stock, and the area was close to friends and family.
After “a few close calls in several auctions” the couple eventually purchased a property at auction in Bexley.
“I recall the vendors lowered their reserve price to meet us, so we considered that a small win after a long journey,” Keough said.
“We were able to achieve unconditional finance with Bendigo with a three-year fixed term at 2.19%.
“We discussed using LMI with our lender and the benefits made total sense for us, the additional cost added onto our repayments were minor, and allowed us to proceed with the purchase.
“Using LMI gave us more options, we didn’t have to sacrifice on location, and were able to purchase our first home with less than a 20% deposit.”
Keough said he was very happy to have eventually secured a home which they could slowly renovate and make their own.
“Conversely, the increase in interest rates and inflation has meant we have had to keep a close eye on our costs and stick to our budget,” he said.
“We are taking the steps now to make sure we can afford our repayments once our fixed term ends, and still have some savings to put away.”
Goal of owning property remains alive
According to McAweeney, buyers haven’t let go of “the great Australian dream” of owning their home, despite rising property prices and interest rates.
“It’s almost fear that's driving it now because they [feel they] can't keep renting and rent isn't getting any cheaper,” McAweeney said.
For many first home buyers, the decision to buy is prompted by the lack of rental affordability, with 48% of those surveyed citing rents are no longer affordable.
“[Rental prices] are driving them to try and find some way of getting on the property ladder and they are actually willing, in bigger numbers now, to move out of Sydney, move out of Melbourne, and go regional and just find value and they’re not afraid to do it,” McAweeney said.
Last month Helia and MFAA partnered to survey mortgage and finance brokers their perceptions about lenders mortgage insurance (LMI) as a pathway to homeownership.
Do you think raising a deposit to buy a property is out of reach for most first-time buyers? Share your thoughts below
