UBank drops home loan fee for some buyers with a 15% house deposit: How it stacks up

Some up-and-coming home buyers who thought they had a 20% deposit may have recently realised they actually need more time to save, to keep up with house prices that continue to shoot through the roof in many parts of the country. UBank is joining the lenders offering a saving on upfront costs, in a move it says could help buyers get on the property ladder seven months earlier. There are a few things for people to consider before jumping in.

UBank announced on Monday it would not charge lenders mortgage insurance (LMI) on owner-occupier mortgages where customers had at least a 15% deposit, or an 85% loan-to-value ratio (LVR), subject to eligibility criteria.

Usually, LMI is charged on loans over 80% LVR, where the customer does not have a 20% deposit, to help protect the lender from financial loss if the borrower can’t afford to meet their home loan repayments.

By UBank waiving this fee, borrowers could save approximately $6,463, for those with a 15% deposit instead of a 20% deposit on a loan of $600,000 with 85% LVR.

UBank, which is a division of National Australia Bank (NAB), joins Westpac subsidiaries St.George, Bank of Melbourne, BankSA and RAMS who also all offer LMI discounts.

St.George’s $1 LMI for a 15% deposit is estimated to save $7,092 on a $600,000 loan, and RAMS’ discount on LMI for a minimum 5% deposit is estimated to save $5,000 on a $600,000 loan. All of these discounts are only available to first home buyers though, unlike UBank’s offer.

UBank CEO Philippa Watson said LMI could potentially add tens of thousands of dollars to a borrower’s loan, and removing the fee could cut down the time it takes to pull a deposit together.

Saving for a home deposit takes an average of 4.6 years, rising to over eight years for Sydneysiders, she said.

“By only requiring a 15% deposit and waiving the need for LMI, UBank can help shave nearly seven months off the process,” Ms Watson said.

Getting in sooner with a smaller deposit may be appealing to prospective homeowners who are keen to buy and thought they had a 20% deposit together, but have been left short changed by rising house prices. Sydney’s median house price rose by $22,429 to reach $950,457 last month, figures for April from CoreLogic show. That means someone saving for a 20% deposit on the median property value would need an extra $4,486.

Will you be better off with a lower deposit and no LMI fees?

Customers who take out the no-LMI offer for a variable loan at UBank would be put onto a 0.15 percentage point-higher interest rate and be paying interest on a larger borrowed amount, compared to those who have a 20% deposit saved up and took out a loan on UBank’s lowest variable rate on our database.

For instance, looking at the interest paid on a $600,000 property, an eligible customer with a 15% deposit would pay a variable rate with principal and interest at 2.49% (comparison rate 2.49%) at UBank and have a $510,000 loan, compared to a customer with a 20% deposit who would have a cheaper rate of 2.34% (comparison rate 2.34%) and a $480,000 loan.

This means over the life of a 30-year loan, the customer with the 15% deposit would end up paying $26,007 more in interest than if they bought the exact same property with a 20% deposit, assuming rates stayed the same throughout that time.

So, are you better off not paying LMI upfront but paying 0.15 percentage points more in interest over the life of the loan?

Canstar finance expert Steve Mickenbecker said you could end up effectively paying LMI over the life of the loan because you’re paying a higher interest rate, but if you paid off the cost of the LMI in around five years or refinanced at that time, you could be better off.

“But the fact is you might have been able to get in a little bit earlier because you didn’t have to provide that $5,000 at the time you were buying,” Mr Mickenbecker said.

The other question is, are you better off buying now with a 15% deposit and avoiding the cost of LMI, or waiting another year and saving more money so you have a 20% deposit, where you’d qualify for a lower interest rate and pay no LMI?

“The consideration here is whether or not home prices continue to go up as they have over the last six months,” Mr Mickenbecker said.

“If you believe prices are going to keep going up at that pace, jumping in now could well save you money in the longer term because you’ll pay a lower entry price, but if you believe the market is due for a correction and won’t sustain this pace, waiting could be the better answer. And no one actually knows for sure.”

UBank is also offering a no-LMI offer with 15% deposits on a three-year fixed rate loan at 2.05% (comparison rate 2.41%), which is 0.20 percentage points higher than the three-year fixed rate you could get with a 20% deposit.