Lenders Mortgage Insurance: What it is and why it's required
Lenders mortgage insurance is required for many new home purchases. Unlike other types of insurance that protect the payee or the payee's family in a time of need, lenders mortgage insurance is a special type of insurance that protects your mortgage lender, although you will be the one paying for it. If you default on your mortgage, the insurance company will give your lender all or part of the money that was borrowed.
To make sure that this insurance is paid on time, the mortgage company will often have you pay (at least a portion of) it at the time of settlement or work it into your monthly mortgage payments. Your deposit will also factor into this equation, since the larger your deposit, the less of a financial risk you are to the mortgage company.
As a matter of fact, if your deposit is large enough (usually more than 20%) and you have a good credit history, you may not have to pay for lenders mortgage insurance at all. However, if you have little to no deposit, the company may be more likely to require at least 12 months worth of lenders mortgage insurance up front.
It is best to start saving for your deposit as soon as you know that you want to purchase a house. The more money you have to put down, the less likely your mortgage company will be to ask you to pay mortgage insurance up front.
You may also want to examine your credit standing when determining whether or not you can bypass lenders mortgage insurance with a large deposit. Chances are if you have a bad history with previous lenders, your mortgage company may ask you to pay lenders mortgage insurance even with a 20% or greater deposit. That doesn't mean that you should not save as much as you can for your deposit. You still have hope that the insurance cost can be reduced or can be built into your monthly mortgage payment.
If you are a first time home buyer, you can even receive additional help attaining your deposit goal. As someone who has never owned a home, you have the chance to qualify for a first time home owner grant (or FHOG) from the Australian government, which will give you $7,000 in tax-free money to put toward your purchase. Best of all, there are very minimal requirements to qualify for this special grant.
The money that you receive from a first time home owner grant would be a great start toward your deposit amount. If you can save just $500 each month for 26-months and obtain a $7,000 grant, that would be a 20% deposit for a $100,000 home. Cut costs wherever you can (i.e. eating out less, driving less, etc.) and your savings will add up in no time.