PROPERTY

The bank offering $1 mortgage insurance to first-home buyers

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St.George Bank is giving other banks a run for their money in a new home loan that does away with one of the biggest deterrents for first-home buyers: saving a 20% deposit.

Take this scenario. You want to buy a house or unit worth $650,000. The rule-of-thumb is that you have to save as much as $130,000 or the traditional 20% deposit.

But because not everyone has this 20% deposit lying around or can save that much over a reasonable period, the go-to solution is to buy lenders mortgage insurance (LMI). This way you can have a deposit of less than 20% and make a one-off payment of about $6000, give or take, for the cost of this insurance.

st george on dollar lmi first home buyers

As the name suggests, LMI insures the lender or the bank from losing more than they lent you in case you default on your mortgage.

But as of this week, St.George is offering home loans where the LMI is only $1 for eligible first-home buyers with a 15% deposit or loan to value ratio (LVR) of up to 85%.

This means as long as a prospective home buyer can save as much as 15% of the property purchase price, they don't have to pay thousands of dollars on LMI.

"Our research shows one of the biggest hurdles for first-home buyers to overcome is the time it takes to save for a deposit, despite being in the financial position to make home loan repayments,"says Ross Miller, general manager at St.George.

In the 2020 St.George Home Buying Survey, it found that the entire process of saving and planning for a first home could take almost 10 years.

"By reducing the expense of LMI, first time purchasers may be able to afford a property that meets their needs sooner and save thousands of dollars," he says.

"It's a good initiative of St.George to help support first-home buyers, especially into our two bigger capital cities of Sydney and Melbourne where house and unit prices are higher than across other parts of the country," says Ben Kingsley, managing director at Empower Wealth.

"In my opinion banks experience very little risk when loan-to-value ratios are lower than 85%, so it's a win for first-home buyers in not having to save the full 20% deposit to avoid paying this insurance, which only protects the banks anyway."

While reducing LMI to less than the cost of a cup of coffee is rare among banks and other lenders, some banks offer a full waiver of LMI for loan-to-value ratios of up to 90% for certain professionals where the average income is relatively high and the job is fairly secure, such as doctors and surgeons.

But given we can't all be in healthcare, law or other specialist fields, Kingsley said it's good to see a bank looking to help more first-home buyers get onto the property ladder with products where you can save thousands of dollars at a lower 15% deposit.

As with any lending options, it's always best to look at the overall lending costs, including other bank fees and charges for the duration of the loan.

"The biggest cost of all is the interest rate they are charging.  When comparing deals like this, be sure to look at the interest rate comparison with other products and be sure to compare each lenders overall offerings," says Kingsley.

Comparison sites help and if you're time-poor or would rather talk to an expert who looks at all the different home loan offerings day in and out, you might want to get a professional mortgage broker to help do this comparison for you.

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Michelle Baltazar is editor-in-chief of Money magazine and an award-winning journalist, editor and publisher. She has worked at media companies including BRW, Shares Magazine (London) and industry newspaper Financial Standard, and has written about superannuation, wealth management, investment technology and financial advice.
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