According to research by Mortgage Choice, 42.1% of prospective home buyers don't understand lenders' mortgage insurance (LMI), even though 32% knew they would have to pay LMI premium to enter the property market.
"According to our survey, only 32.1% of prospective buyers accurately stated that LMI is designed to protect the lender if a borrower can't repay their mortgage," Mortgage Choice CEO Susan Mitchell said in a finder.com.au report. "Another 8.2% of respondents thought LMI protected the borrower, while 17.6% believed it protected both the borrower and the lender."
Millennials were found to have the worst understanding of LMI, with 47% of buyers aged 29 and under misunderstanding the insurance product.
Mitchell said the misunderstandings around LMI were worrying, since many first home buyers would likely need to pay an LMI premium.
"According to CoreLogic, the median dwelling value in Australia is $554,605, and for a first home buyer to avoid LMI, they would need to save $110,921 for a 20% deposit – and they would still need to have additional funds to cover costs such as legal fees and stamp duty,” Mitchell said. “That is quite a large sum to save, and it only increases if a buyer is looking in cities such as Sydney and Melbourne.”
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