Why mortgage insurance might actually save you money

The banks have definitely tightened up their lending criteria this year and for many investors, that means you need a 20 per cent deposit.

However, some banks still allow investors to borrow up to 85, 90 and even 95 per cent of the loan. But that poses another problem – the dreaded mortgage insurance costs which investors usually become liable for when they borrow more than 80 per cent of the property’s value.

Jane Slack-Smith of Investors Choice says mortgage insurance can cost thousands of dollars and even tens of thousands of dollars in some cases. The thought might be enough to force any investor to ditch weekend restaurants for cheap home meals on the weekend, as they decide to save, save and save for that 20 per cent deposit.

However, Slack-Smith warns waiting for a larger deposit might actually cost you money.

“I see mortgage insurance as an opportunity cost,” Slack-Smith says.

“I bought my first house for $425,000 with a five per cent deposit. If I’d waited until I had a 20 per cent deposit, it would have taken me five years to save and the property would have been worth $600,000. I would therefore be buying a property of a lesser standard by the time I’d saved the 20 per cent.”

Paul Sparta of Hegney Property Group agrees. He says investors need to ask ‘why wait’ if they can afford to buy now and pay a little mortgage insurance.

“I don’t understand the logic of why sit here and wait. If you’re ready, you should buy. But you have to be ready in yourself, otherwise what’s the point?”

He believes having job security right now should be the most important factor when it comes to deciding whether or not to buy an investment property.

On the other hand, Mortgage Choice spokesperson Kristy Sheppard says paying mortgage insurance should be an individual choice.

“You need to consider how urgently you want to buy and whether or not you need to wait until you have the 20 per cent deposit,” Sheppard says.

“A lot of people want to get into the market and a few thousand dollars isn’t a big issue for them. Other people are very careful about every single cent. They’re the sort of people who think long and hard about waiting.”

Sheppard adds investors should weigh up whether or not waiting for the 20 per cent deposit will make them better or worse off. In other words, could property prices rise faster than your savings? She says around 15 per cent of first homebuyers have a 20 per cent deposit, but the number of people saving for a larger deposit is starting to increase. This year, for example, 17 per cent of first homebuyers had a 20 per cent deposit, compared to 12 per cent last year.

“Property prices have stablised and aren’t expected to rise quickly,” she says.

“But things can turn around pretty quickly.”

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