Newsletter

May 2023

May 12, 2023

Welcome to the latest edition of our client newsletter,

Our articles cover a range of topics which we hope you will find interesting. We aim to keep you informed of changes as they happen, but we also want to provide ideas to help you live the life you want – now and in the future.

In this edition we discuss “Understanding LMI” and provide you with information on “Information on House deposits” and “Difference between Term Deposits and Savings account”.

Recently Ali went to Boston and completed “Leadership and Management course from Harvard”. Boston is one of the most historic cities in the United States. Known as the “Cradle of Modern America,” Ali had a great experience in Boston.
If you would like to discuss any of the issues raised in this newsletter, please don’t hesitate to contact us.

In the meantime we hope you enjoy the read.

All the best,

Planet Wealth

921, High St Road, Glen Waverley, Vic 3150 P 1300 004 254

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Any advice contained in this document is of a general nature only and does not take into account the objectives, financial situation or needs of any particular person. Before making any decision, you should consider the appropriateness of the advice with regard to those matters. If you decide to purchase or vary a financial product, your advisers, our practice, AMP Financial Planning, its associates and other companies within the AMP Group may receive fees and other benefits, which will be a dollar amount and/or a percentage of either the premium you pay or the value of your investments. Ask us for more details. If you no longer wish to receive direct marketing from us please call us on the number in this document and if you prefer not to receive services information from AMP, you may opt out by contacting AMP on 1300 157 173. To view our privacy policy visit www.amp.com.au

Understanding Lender’s Mortgage Insurance (LMI)

If you’re looking to buy a home or investment property, or considering refinancing, it helps to understand the role of lender’s mortgage insurance.

What is lender’s mortgage insurance?

Lender’s mortgage insurance (LMI) protects your lender when you take out a home loan where there’s an increased risk associated with your loan.

If you have a deposit of at least 20% of a property’s purchase price, generally you won’t be asked to pay this type of insurance*.

However, if a lender (such as a bank or financial institution) agrees to lend you more than 80% of the property’s value, there is a higher risk that—if the loan isn’t repaid as agreed-the lender may lose money. That’s where LMI comes in. It’s important to understand it’s there to protect the lender, not the borrower, unlike some other types of insurance.

When do I need lender’s mortgage insurance?

As a property buyer, you may need LMI if your deposit is less than 20% of what the lender thinks your property is worth, sometimes called a bank or lender- assessed valuation. Note that your lender’s value of the property may not be the same as the purchase price you pay, or what you believe your existing home is worth.

What is the cost of LMI?

It is a one-off cost that will generally come down to the lender you choose, the loan amount, the size of the deposit you have, and the value of the property that you’re looking to buy or refinance.

LMI is calculated as a percentage of the loan amount. It varies depending on a number of factors including your loan to value ratio and how much you plan to borrow.

Alternatively, you may be able to add the LMI fee to your total home loan amount. However, it’s important to note that this will increase what you owe, what you will have to pay back in interest, as well as your minimum monthly loan repayments.

Can I avoid paying LMI?

If you can’t save up a 20% deposit, you could avoid the costs of LMI if someone acts as a guarantor for your home loan.

A guarantor is responsible for paying back the entire loan if the borrower can’t. The property to be purchased or refinanced acts as partial security for the lender, and the equity in a guarantor’s property provides additional security. Guarantors generally need to be immediate family members, though each provider may have its own terms and conditions.

Risks of having a guarantor

• The guarantor’s property and credit rating could be put at risk if the borrower doesn’t repay the loan.
• By tying up the equity in their own home, the guarantor may not be able to use it if they need to.
• Relationships could be affected if things don’t go to plan.

It’s important that your potential guarantor understands what’s involved, and seeks legal and financial advice before acting as a third party on your loan.

Don’t confuse LMI with mortgage protection insurance. Mortgage protection insurance is designed to help you meet your mortgage repayments if you become seriously ill or incapacitated and can’t work.

What happens if I refinance?

When you refinance, your original mortgage ends and you make a new loan arrangement with another lender. You can’t transfer an LMI policy.

That means you’ll need to pay for a new LMI policy if you still have a low amount of equity in the property (you’re borrowing more than 80% of the property’s value).

The pros and cons of LMI

Pros

• If you can meet the normal lending criteria but can’t make it to the 20% deposit threshold, you may still get into the property market with a smaller amount, as long as you can meet the mortgage repayments. – You won’t need a guarantor to supply additional security.

Cons

• It’s an extra cost to pay on top of your home loan.
• You’re paying the lender’s mortgage insurance costs.

Is it worth paying LMI or should I save more?

Home buyers often debate whether it’s better to hold off on house hunting until they’ve saved up a bigger deposit or bite the bullet and pay LMI.

Every buyer’s situation is different and may depend for instance on how likely they are to be able to find a bigger deposit and whether they think house prices will rise or fall.

For example, if you’re looking to get a place of your own to start a family in a city with rising house prices, you might find it hard to get close to a 20% deposit.

You may be keen to get into the property market as soon as you can, because you think prices will accelerate faster than your ability to raise a larger deposit.

If that is the case, you might opt to pay LMI because you believe the chance of capital gain in a rising market outweighs the cost of LMI.

Alternatively, you might feel more comfortable waiting until you have a deposit big enough to pay less, or no LMI.

The answer depends on your personal circumstances, as well as factors such as loan amount, house market volatility and interest rates.

Have a word with your mortgage broker or talk to us about what’s right for you.

* Restrictions may apply if the security property is in
a rural or remote location.
© AWM Services Pty Ltd.

5 Things to consider when saving for a house deposit

Find out how much you can borrow

Before you can step onto the property ladder and buy your first home. you’ll likely have to do some serious saving to build up a deposit. Here are some things to consider that can help get you started,and on the road to home ownership sooner.

Work out your current situation

It might sound Obvious. but It’s easier to reach a savings goal when you know where you are starting from understanding your current financial situation -what your Income and expenses are will help you set a budget. You can then track your spending and save a set amount each week. fortnight or month towards your deposit.

Find out how much you can borrow

Knowing how much you might be able borrow can help you figure out how much home loan deposit you’ll need to save. Borrowing calculators can give you an idea of how much you may be able to borrow. Remember though, the amount calculated is only an estimate based on the income and expenses you put in. It’s likely to differ from the amount a lender formally approves you for when the time comes.

It’s also important to remember that interest rates do change, so think about building a buffer into the repayment amount so that you’d still be able to cover your loan repayments if intrest rates rise.

Figure out how much deposit you need

Once you know roughly how much you might be able to borrow, compare this with the cost of your ideal property and it can give you a good ballpark figure to aim for. The size of the deposit you need for a home loan is typicalty 20%. Although in some circumstances it may be possible for home buyres to have as little as 5% deposit.

Understaing the loan to value ratio and whether you’ll need to pay lenders mortgage Insurance can also help you work out how much you can afford to spend when buying a property.

When you’re closer to reaching your house deposit goal,you can speak to lender about condition approval a home loan.

Don’t forget the other upfront costs associated with buying a home such as legal fees, building and pest inspection fees, stamp duty, moving
costs and insurances.

Know how long you’ll be saving for

Of course, this all depends on how much you can afford to save each month. But every dollar you can put towards your savings plan means growing a bigger deposit or saving money for less time.

As an example:

Purchase Price	20% Deposit	Amount Saved Each Month	Number of Months to reach deposit goal
$300,000	$60,000	$2000	30
$500,000	$100,000	$2500	40
$700,000	$140,000	$3000	47
$1000,000	$200,000	$3500	57

Term deposit vs savings account: what’s the difference?

Term deposits offer certainty and savings accounts offer flexibility. Here are some other common features and benefits of each.

Putting your money into a savings account, or a term deposit, are two common methods of saving. Working out whether either of these options are right for you depends on your personal and financial circumstances, as well as your savings goals.

To look at this simply, a separate savings account where your money is readily accessible might be useful for a short-term goal. A term deposit, where your money may be tied up for a longer period of time in return for generally higher interest, could be a more suitable option for a longer-term goal.

Term deposits

Term deposits work by locking your money away for a certain timeframe (or ‘term’) in exchange for a fixed interest rate return at the end of that term. A general rule of thumb is the longer the term, the higher the interest rate. Terms vary, but usually range from as short as one month to as long as five years. They’re worth considering if you’re looking to get an exact amount by a certain date, and don’t need to access the money before the agreed term ends.

• If the cash rate rises, you won’t be able to obtain the benefit of that increase for your term deposit.
• Your money is locked away for the full term.
• You’ll have to give notice to access it early, usually around 31 days.
• You’ll have to pay a penalty fee or earn less interest if you take your money out before the end of the term.
• A minimum initial deposit is required, which can vary widely.
• There’s no option to top up funds once you’ve opened a term deposit.

Interest rates on savings accounts Standard savings accounts usually offer low fees and immediate access to your money, but you may get a lower interest rate compared to a term deposit. Interest rates are quoted per annum, applied as a percentage to the money you have in your savings account on a daily basis, and credited monthly.

As the name suggests, high-interest savings accounts typically have higher interest rates, but there may be penalties for withdrawing your money before a set period of time has passed, or if you don’t meet the required number of debit card purchases or ongoing minimum deposit requirements.

What to consider before opening a savings account? Things to consider:

• fees charged
• interest rates
• how accessible your money is
• whether you can set up an automatic direct debit, and
• whether there’s a minimum amount you need to deposit each month. There’s a variety of savings accounts in the market so use this checklist to help find the right savings account for your situation.

How fees compare

Term deposits usually come with no set-up fee. However, if you need to withdraw your money before the maturity date, you’ll likely have to give notice in advance of your withdrawal and pay a fee or earn less interest.

Some savings accounts attract set-up fees and may also include anything from monthly account keeping fees to withdrawal fees. So, when it comes to comparing accounts, make sure you’re across any potential fees or charges your provider may apply to your account.

© AWM Services Pty Ltd. First published May 2022