Advantages of Expat and Temporary Resident Home Loans over 80%

There is always debate about whether lenders mortgage insurance is a good or bad thing.  Naturally, no one likes to pay fees especially when they amount to many thousands of dollars.  But it needs to be remembered that for many people, accumulating a 20% deposit to purchase a property while renting and in a rising market, is very difficult and without mortgage insurance the dream of home ownership would be a distant reality for many.

I have done the figures many times for Australian Expats and Temporary Residents seeking a home loan in Australia and compared a person who rents for an extra 3-4 years to save up that 20% deposit compared to the person that buys now without the 20% deposit.  The amount of rent (which is dead money) one would have paid just in 6 months would easily cover the mortgage insurance that would have been incurred on purchase.  If the property market is rising then you would have also gained some equity in your property rather than now having to save a larger deposit to make up the 20%.

Naturally though if you have a 20% deposit and only want to buy the one property then you may as well use it and save yourself the fee.  But one of the great advantages of borrowing over 80% is that you may be able to buy more than one property.  You will be charged lenders mortgage insurance if you borrow over 80% but mortgage insurance is normally only 1-2% of the purchase price.  A small rise in the property market of 5% on two properties would see you ahead compared to just buying one property at 80% and seeing a 5% rise only in that one property.

If mortgage insurance was 2% of the purchase price and there was a 5% rise in the first year in property values, then your net effect is you are ahead by 6% for the first year (ie, 5% x 2 properties less 2% x 2 for Mortgage Insurance). If year 2 saw another 5% rise then your mortgage insurance has been paid so you are now seeing a 10% rise for your investment rather than just the 5% for one property.

You may also have a bigger negative gearing effect as you have more tax deductible debt.  The Lenders Mortgage Insurance may also be tax deductible, written off as a borrowing cost over a 5 year period.