20%, 10% or 5% Deposit?

[Michael_X]

Hi all,

First time poster

I have been chatting to a few mortgage brokers and each have different opinions on the deposit amount, so rather confused.

Firstly my situation:

- Work full time PAYG in a secure industry
- Own two investment properties, both IO loans with Homeside at 630k with good service history
- Investment strategy is to buy/hold properties around the 200-250k, add equity through renos, draw down on the equity to make more purchases
- Total borrowing capacity an additional ~$800k
- $90k equity saved (30k from current investment properties)

Browsing the forum, some suggestions were to go hard at the start. So 5% + LMI, particularly for properties below the $300k mark.

However speaking to some experienced investors, they stated that 95% will only get you so far and in the long run it's better to go at 80% as banks are more willing to lend to you?

Perhaps a balance between the two is best at 10%?

Very interested to hear everyone's thoughts.

Thank you!

 

[Aaron_C]

I am an advocate of LMI if you are looking to purchase quickly. 95% lends are fine below $300,000 but become a bit more pricey beyond that mark. It all depends on what you are personally comfortable with.

 

[Michael_X]

I am comfortable with 95%. I guess another question is will this affect my borrowing capacity in the long run by going with several 95% loans?

 

[saiman]

it may not affect your borrowing capacity but it certainly is far far easier to refinance/topup when there is no LMI attached

 

[Rolf Latham]

95 will only get you so far and 90 % will only get you a little further, which is why a structured approach in your case might be "go hard go early".

Mostly, now with most LMI providers capping the total LVR at 95, a 90 + lmi premium is a better fit, but does vary for the sub 300 k loan bracket

Id guess your real current borrow capacity in terms of income is probably twice ( if not more) than what you quote, which is why its important to extend your leverage now if that suits your risk profile and future goals.

How do I know ? ................I dont, but im taking a punt that there was no structured rhyme or reason you are with HSL for both IPS unless your income / serviceability numbers have jumped a lot since those purchases.

HSL one would normally leave until you need the serviceability, and use the bottom end of the serviceability pile with Delegated LMI underwriting authority first ..........CBA Suncorp ANZ etc, and leave the NABs. Macqs, ABLs and AMPs until such time you really need them.

ta
rolf

 

[Jamie M]

High LVR's and leveraging LMI can work out well for certain investors and not so well for others.

It all comes down to your own risk profile and strategy. Some people take comfort from knowing that their portfolio is sitting at a low LVR - others see it as wasted equity that could be used to accumulate more.

From a lending point of view - it's a lot easier to get 90% deals across the line in comparison to 95% lends (but that's not to say it isn't possible - and we do 95% deals quite a lot).

Aaron touched on the LMI costs - that's another thing to consider at certain loan amounts. Also, some lenders are beginning to move away from 95% plus capped LMI on IP loans.

Cheers

Jamie

 

[Brady]

I am an advocate of LMI if you are looking to purchase quickly. 95% lends are fine below $300,000 but become a bit more pricey beyond that mark. It all depends on what you are personally comfortable with.

Aaron is bang on, there is a price point at $300,000 over that and LMI becomes a little bit expensive for >90%

All depends on how aggressive you want to be, but LMI can just be apart of doing business. If the deal stacks up.

Note that there are lenders that will only go up to 95% including LMI, others will still go 95% + LMI.

I like 90% especially if its with a lender that only goes 95% including LMI becuase your base LVR is already ~93% so for an extra ~$6000 funds put down you can be at 90%,which will save you few thousand in LMI. Ive found banks are happier to lend at this LVR and with some you will find that 90% LVR is a price point for good discounts as well.

 

[Peter_Tersteeg]

It obviously comes down to a cost-benefit analysis, you need to look at the actual figures of what LMI will cost you and how much extra you'll be able to borrow as a result. Sometimes the ability to capitalise the LMI also comes into it.

For most lenders, 90% is no big deal and in most cases you can add the LMI on top of that (HomeSide is one notable exception here).

On the other hand, quite a few lenders are not able to capitalise the LMI on top of a 95%. This effectively means that you might be borrowing about 92% plus LMI to a total of 95%. It can become a case of borrowing $3 only to give $1 straight back to the bank - not a good trade off if you don't need it.

Also keep in mind that many lenders are pricing "rate for risk". As a result, the higher the LVR, the higher the interest rate. Again as an example, HomeSide has a 0.22% rate difference between a 90% and an 95% loan. Various lenders have other policies that may also effect the outcome of a current or future application based on LVR.

It really comes down to how much to you need to borrow to execute your overall strategy. If it's necessary to go to 95% then that's fine, but it does come at a cost. If your goals will be met borrowing at 80% or 90%, then this will likely be a cheaper option.

If you are going to persue an agressive strategy and will want to borrow at the higher LVRs, it's much better to do it early. LMI does become harder to qualify for as your portfolio grows.

The best advice is to simply ensure that your broker makes the different figures plus the pros and cons clear to you, so you can make an educated decision.

 

[Michael_X]

95 will only get you so far and 90 % will only get you a little further, which is why a structured approach in your case might be "go hard go early".

Mostly, now with most LMI providers capping the total LVR at 95, a 90 + lmi premium is a better fit, but does vary for the sub 300 k loan bracket

Id guess your real current borrow capacity in terms of income is probably twice ( if not more) than what you quote, which is why its important to extend your leverage now if that suits your risk profile and future goals.

How do I know ? ................I dont, but im taking a punt that there was no structured rhyme or reason you are with HSL for both IPS unless your income / serviceability numbers have jumped a lot since those purchases.

HSL one would normally leave until you need the serviceability, and use the bottom end of the serviceability pile with Delegated LMI underwriting authority first ..........CBA Suncorp ANZ etc, and leave the NABs. Macqs, ABLs and AMPs until such time you really need them.

ta
rolf

Wow, thanks for the awesome advice everyone - love this forum!

Rolf - the two loans with Homeside were taken out a few years ago and done without much reasoning apart from listening blindly to a mortgage broker. So your advice is to go else where first like Suncorp and then come back to Homeside?

 

[Michael_X]

it may not affect your borrowing capacity but it certainly is far far easier to refinance/topup when there is no LMI attached

Are you able to expand on the top up with LMI? Is it alot more difficult to access the equity?

 

[Rolf Latham]

Wow, thanks for the awesome advice everyone - love this forum!

Rolf - the two loans with Homeside were taken out a few years ago and done without much reasoning apart from listening blindly to a mortgage broker. So your advice is to go else where first like Suncorp and then come back to Homeside?

I guess part of your challenge is this

I have been chatting to a few mortgage brokers

Dont take it the wrong way, but if I suggested that casual approach to you for your Property Selection you'd think I was 2 short of a six pack.

At the edges, an average selected B&H IP portfolio with finance structured to your goals, will, over time outperform a brilliantly selected B&H portfolio with poorly structured finance. Note that unless you are very lucky, an unstructured or ad hoc finance approach is poorly structured finance.

Poor finance is the primary reason most people hit the serviceability or equity wall long before they need to................and in most cases want to, and then Human Nature gets in the way, and it all gets too hard.......

What I suggest you do for yourself is to work out what you want in 10 to 15 years time. Put a peg in the ground and work backwards from there. Ask your banker or your broker and the other "advisers" to MODEL the way they will get you there. Its right there where the chat stops and those with experience and resources can show you where you want to go by taking on the actual road

Most bankers and brokers are happy to take a transaction between traffic lights, and not willing to walk from something they know wont serve the client long term. Find a banker or broker that challenges you and that you can engage with.

PS suncorp is ok if you want to not cap LMI over 90............ BUT there is no simple one fix...........

ta
rolf

 

[Rolf Latham]

Ive found banks are happier to lend at this LVR and with some you will find that 90% LVR is a price point for good discounts as well.

90 % flat or 88 % + added LMI is def the max sweet spot for those lenders with credit score black boxes.

Id guess you need to be 25 % more "creditworthy" for a 95 er than a 90


ta
rolf

 

[Qlds007]

Over 90% with Suncorp requires a P & I loan rather than a IO so might have a bearing.

 

[Rickardo]

Hi MXia.

You've been given some great advice from some experienced brokers here. I suggest you have a chat with a few of them and start working with one that you like, it can make a huge difference to your portfolio.

I have personally used Rolf Latham and Aaron C and both are great, the others I haven't used but all are very experienced with assisting investors

 

[blw101]

Literally just got off the phone with my broker on this.

Have some equity in existing IP's and looking to buy another around mid 500's.

Refinance to get additional 30k for partial deposit: at 90% LMI is $600, over 90% it was over $3k

Borrowing remaining 500k: at 90% the LMI was 8-9k. At 90.01% it jumped to $20k+

No brainer for me at that purchase level.

 

[Aaron_C]

Well I don't think the LMI would've gone from 10k to 20k at 90%+ but the general idea is right lol. More like 10k -> 13k.

 

[Michael_X]

Thanks for the advice everyone Much appreciated!

 

[Chris B]

Are you able to expand on the top up with LMI? Is it alot more difficult to access the equity?

It all depends on your goals, risk profile & future plans but you pay new LMI if you want to refinance to access the equity if you're still over 80% LVR. When house prices were increasing by ~10% each year, it wouldn't take long for people to build equity and be able to put it to use on another IP but in the current market I would much prefer to keep LVR low to minimise LMI and have the flexibility to deal with changes in lifestyle, circumstances, etc. Low LVR also makes it much easier for IP to be cashflow+

I'm not against paying LMI but I don't want to be paying it twice on the same property and I don't think we can rely on capital growth outperforming savings a/c rates for at least a year or two.

Too many people seem to be getting 90-95% interest only loans for 5 years without a real strategy of what they want to achieve. The properties are usually costing them money (even at these historically low rates) and they will need decent capital growth just to break even. Haven't we learned anything from the GFC?

 

[Michael_X]

Hi Chris,

Thanks for the advice. A mortgage broker I spoke to suggested removing LMI on an existing loan which I purchased at 90% by switching banks and refinancing to 80%. The loan amount is 305k and needs around 10-15k to get down to 80%

Is this worthwhile - losing LMI to have the added flexibility?

 

[Aaron_C]

Hi MXia,

That's a stupid idea. You are throwing money away if you've already paid LMI.

Unless there is some really compelling reasons, if you have already paid LMI on a property you should always go back to that same lender to get a TOP UP on the existing loan so you don't pay LMI twice. So, if you got a loan of say $300,000 but you already paid LMI of $5,000, then if you want to increase that loan to say $330,000 and get $30,000 out, then you only get charged LMI on the net increase in the premium. So if the new LMI premium is $5,500, you only pay an extra $500. This is a far better outcome for you, although not for the broker since he only gets paid commission on the $30,000 rather than the entire refinance.