Mortgage insurance, what it is, what it costs and who it actually covers…
So many young Australians buying their first home will end up paying mortgage insurance, purely because we jump into home ownership without having saved a big enough deposit.
Most first homes are purchased with less than 20% deposit, and this is the point at which mortgage insurance kicks in.
On the contrary…
Contrary to popular belief, mortgage insurance protects the lender, not you. It protects them against a home selling for less than the lender is owed, if you default on your home loan and they need to repossess and sell the property.
So it covers them, but you pay. The premise is that if you have managed to save a 20% deposit then you are statistically unlikely to default on your home loan repayments. The lender is willing to take the risk on.
Those who have saved less then 20% deposit are far more likely to get into financial trouble. The lending in unwilling to take the risk on, and hence the requirement for you to purchase mortgage lenders insurance.
The cost of this insurance decreases the closer you are to your 20% deposit, and is more expensive for those with lower and lower deposits.
But all in all, this is exactly the opposite of FREE MONEY, this is a total waste of money, and something that you can never recover.
It’s a cost of purchasing property that should be avoided where possible, as it simply means the value of your home has to increase by more in order for you receive a good return on your property investment.
Given that we have to pay stamp duty aswell, which is another big waste of money, we don’t want to have to pay this too.
Do all you can to get as close to that 20% deposit as you can and think of all the great things you can do with your new home with that money.
It could be a fresh coat of paint, new furniture, even a small reno. If that’s not compelling enough, I don’t know what is.
I talk a lot more about property and how it all works in my 8 Week Money Makeover Program, definitely worth checking out if you are saving for a home and want to make sure you get it right.