After building the rent vs buy calculator, I was asked to calculate if one should save for a larger deposit to reduce the Lenders Mortgage Insurance (LMI) or pay the deposit and move into a home earlier. So we built one.
Again I asked Jayen to help me build it and used Codesandbox.io this time to collaborate. (Tip: Codesandbox wasn’t as easy to deploy to my own hosting afterwards as Codepen was… but has a simple deploy option if you don’t want to host your own!).
Spoiler – In most cases you should just bite the bullet!
In Australia, most banks have a limit of lending 80% of the property value. However they also have a mechanism to lend up to 95% of the property value if you pay for Lenders Mortgage Insurance and qualify. There are some banks that will allow you to capitalise your Lenders Mortgage Insurance (ie let you borrow the amount for the insurance)! Lenders Mortgage Insurance (LMI from herein on) covers the lender, not you! But you have the privilege of paying for it. LMI covers the lender in case of you defaulting on the loan.
LMI varies across banks and lenders as they usually have a panel of insurers who can provide them with insurance. The way that LMI works is a sliding scale where the more you need to borrow or the higher the LVR (Loan to Value Ratio) the higher the percentage the fee is.
When using the To LMI or to not LMI calculator keep in mind I’ve just used a LMI table found which calculates an estimate of LMI. YMMV.
In most cases I’ve found it’s better to just buy the property but that is assuming you are in a rising market and that you are renting during the time you aren’t in your home. Remember the other calculator built indicated in most cases that rent money is dead money.
To do your own calculation hit up the To LMI or not LMI calculator – geared.net.au/lmi-or-later.