Larger Deposit VS LMI

got a friend who is looking to purchase 2-3 properties shortly, got enough cash to buy one of them out, this friend has asked me to explain how LMI works, so I sent her a link.

next question was, which I didn't want to answer,

I know that some people say LMI is a cost of doing business, fair enough, however if you can reduce it why not.

so if she has 33% deposit for example (im not 100% on her figures), should she put 33% in, for 3 of them, or should she put 20% in and keep the other 13% per property for a rainy day or for another IP which I don't think she is planning to.... or should she go 95% LVR for all of them and keep the remaining 28% depoist in an offset account while having to pay LMI.....

thanks everyone
 
Hard to answer..............

need a lot more soft data, so one can make a risk assessment.

Certainly would not put away all the cash into the properties and hld some back

ta
rolf
 
if your friend is going to use the money to buy plasma tv's then I would put in a bigger deposit and give the LMI a miss. If the money is used for other investments or offset account until its large enough for another deposit then in my opinion this is preferable.
 
what sort of info would help guys. She is quite investment savvy. No plasma for her. Any left over she would put into the next one but she said three is enough for now. So i would assume it would be kept in a term deposit or in a standard bank account.0hope this helps
 
Hi PM

There is more to property investing than using a deposit, or paying / not paying mortgage insurance

Some people like to buy one property, pay off the debt, redraw the money, buy another etc

Some people like to use as much of their own money as possible, other people use the least they can

Some people want to buy the whole street, others want one investment property and that's enough for them.

Explaining the mechanics of 'how' something works is important, but each investor will develop their own style and what works well for them.



There is only one opportunity to 'borrow to the max' and that is at the time of buying.


Borrowing the maximum establishes the finance base for the property for tax purposes. The original loan is the only loan relevant to that property, unless there are further borrowings later for improvement to the property.

For people on low incomes, the tax relevance is of not much concern, however people's circumstances change and they can often look back and wish that they had 'known then what they know now'.


For example, when No: 1 Son bought his first property he was working weekends at Bi-Lo. Later, he worked full time, then returned to study, then to full time work and is now overseas.

Since he bought that property he has had five quite different tax circumstances, but the borrowings arranged at time of purchase were the maximum we could do for the property - with structuring, 100%LVR plus costs.

Yes, it cost him a bit of mortgage insurance, but this has been amortised over the first five years of the loan. Without the mortgage insurance he would have missed out on establishing the historic cost base of the finance. With the left over money, he put it in an offset account and so paid reduced interest but still had access to the money.



What are the circumstances of your friend? This is what is relevant, not whether mortgage insurance will or won't be payable.

Mortgage Insurance, as it is insurance, is calculated on exposure and value of the risk. If your friend is buying low cost properties then even a high level lend may cost little to insure. If she is buying high cost properties then her dollar cost may be more but the relative cost may be low.


Saving pennies may seem like a good idea. I refinanced a 100% loan last year for customers of mine who had no money, honey, when they first contacted me but bought their first home on a wing and a prayer.

18 months later, they wanted to access the equity in the property to build a garage, and wanted to change lenders. This cost them quite a bit in break costs and in new establishment costs, and I suggested that they go to 95%LVR with the new lender but they thought about it and said that 90%LVR would be all they needed.

Two weeks ago they contacted me again and now they want to do the kitchen, however in the past 12 months values have not improved much and their lender no longer lends over 90%LVR.



PM, property investing, like life itself, is all about striking while the iron is hot.


Your friend needs to think about what she really intends doing, why she is doing it and what she hopes to achieve.

We can only deal with today, and if we want to maximise our opportunity we have to maximise it today.


Hope this helps

Kristine
 
hi kristine. Thanks for your post. All the examples i could perfectly understand. However. You lost me with your summary about circumstances changing. My friend wants to take advantage of the current market. She has medium income however tax deductions aren't a big deal for her. She wants to buy all quite cheapproperties. So maybe lmi won't be expensive. However it is am extra cost, deductable or not. So she basically wants to know the excess money will just sit there however lmi is applied or the cash goes into the property but there is on lmi
 
Hi PM

The reference to changing circumstances is about tax relevance and gearing.

Generally speaking, people's income grow over time, but not always.

My example was to illustrate that someone working weekends does not pay much tax so the gearing benefits are trivial, then studying, working, returning to study, being overseas - these are all quite different income & tax situations.

In other words, your friend may be earning 'x' now, but over the next, say, five years her income may increase, decrease or change completely.

Mortgage insurance, and the ability to amortise the expense, will therefore also change. Mortgage insurance is only paid once, but like all capital cost items can be depreciated over time, adding a non-cash depreciation benefit to the true cash flow of the investment.

So if your friend pays, say, $1,000 mortgage insurance premium to establish the loan at a higher than needed LVR, that $1,000 could be amortised at $200 non-cash depreciation over the next five years.

True, you can't get all the expense back, but as with my customers with the garage and then the kitchen, if your friend want to make sure that she has money for the next purchase, or just for a reserve funds, she may want to consider borrowing more at time of purchase and depositing the surplus funds into an offset account.

Of course, she only needs one offset account. A dollar is a dollar, having more than one offset account serves no greater purpose than having just one.


She won't know 'how much' the mortgage insurance will cost until her broker does some worksheets for her detailing various purchase price points and various LVR eg 80%, 85%, 95% or whatever.

When she has the figures she can make a decision. It's hard to make a practical decision based on guesswork

Cheers
Kristine
 
thanks everyone, esp kristine

Ill send her the link to this post,

from what I have spoken to her, I think she will see how much the LMI, if its say $1-2k (property prices around $350k) then I think she will go 95% lvr,

if its anything more then $3-$4k, since it represents 1% of the price, she will go for 80% LVR

I will be giving her the example, say if she had $20k left over per property, then with interest rates at 5% say, then thats roughly $1k interest per year she saves with the offset of $20k, so if its only $1k-$2k in LMI, then she might go for it.....
 
my mum was in this situation 275k cash, i told here to borrow maximum 195.
to buy 330k property , she puts in 135k so thats close to 38% LVR with 150k ish left in bank as a buffer/offset/investing in future or reno liquid cash.

195k roughly around 1150$ p/m repayments. with interest only charged on 50k cause rest is offseted.

i am not sure if this is the best option but i plan to go joint purchase with her in future date and that 150k in offset account would help to fund another purchase or 2. thats my plan anywayz is it viable ? probaly yes because she only works 2 days a week and the rent should cover the IP repayments (for now its CF+ 80$ per month).
 
Hiya

LMI at 95 % is more likely going to be 1.8 to 3 % of the loan value depending on lender etc

2.5 % of the loan value amortised over the life of the loan isnt a lot of money when you understand that you are transferring BIG risk from yourself to the mortgage insurer.

ta
rolf
 
Hiya

LMI at 95 % is more likely going to be 1.8 to 3 % of the loan value depending on lender etc

2.5 % of the loan value amortised over the life of the loan isnt a lot of money when you understand that you are transferring BIG risk from yourself to the mortgage insurer.

ta
rolf

Completely agree with that however, to be perfectly honest,I don't think 80% finance is any different in terms risk compared to 100%. I reckon that if you are going to default, you will anyway, say for a LVR over 50%, but thats just my personal opinion....

2.5% over the life may not be much but for an upfront cost, I must admit its not peanuts....

eg $400k property = $10k......
 
Hiya PM

Nah

HUGE difference !

Most INVOLUNTARYdefaults occue because of a 3 to 6 mth loss of income ( though I dont have any "proof" of those numbers).

If you buy a place at say 350 k at 80 % lvr and spend al ur cash in doing so, you are quite exposed to loss of income.

If you go for a 90 % lend with capped LMI, you have 35 000 sitting in your safety account.

Obviously of one has a slush fund sitting elsewhere after the 80 % purchase than this need not apply.

I just wanted to make sure that when people read this that they understand the concept of " whose risk is it anyway " ?

Ta
rolf
 
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