5% deposit versus 20% deposit

[Rolf Latham]

Definatly NOT...
If the banks undertook prudent lending habits there would be no need to nationalise them and they continue as is

Prudent for which stakeholder exactly?

Oz banks did pretty well in general throughout the GFC.............

LVR of itself isnt a risk indicator to capital if properly transferred to a mortgage insurer which is a proper third party.

BTW, the majority of loans are nothing like 95 % lends,and in general most brokers and bankers will avoid them and look for a min 90% lend

Well below 80 % LVR the risk to capital falls away, and this can be seen in some lenders pricing

ta
rolf

 

[Aaron_C]

For some reason people assume that everyone who buys a property is geared to their eyeballs. Sure, there are some of those people who are in negative equity from day 1 but that is usually first home buyers in the fringe suburbs. Everyone else in the inner-city ring or in middle suburbia has pretty much low LVRs.

 

[BayView]

Most people that invest in real estate seem to put 20% deposits down so that they can avoid LMI.

What I have been doing for the last two properties was buy them with 5% deposits. This means that you can buy at least twice as many properties as you could if you used a 20% deposit.

As LMI comes into play, obviously your returns are going to be somewhat reduced due to the increased loan size. But I have found that it's only 2-3%, so it doesn't make a huge difference.

If the properties that I buy have a rental return of 7.5% and I can get money for 5.5%, that means that my overall cash flow will be higher buying two properties using a 5% deposit as opposed to one property with a 20% deposit.
While the initial equity is going to be less, the higher leveraging should fix that after a couple of years.

Is there a problem with this strategy? I'd like to hear your views on it.

The only problem with it is the risk aspect.

The worst case scenario for any large purchase of anything with debt attached to it is if you have to sell it because life threw you a curve ball....

And it does.

LMI only protects the Bank from losing it's loan money; not you.

If you default and the Bank steps in, they get their money, but the LMI crowd comes after you.

The lower your LVR the safer you are - unless your cashflow is notably higher than the debt.

A 7.5% return is not high enough if it is a gross return.

 

[Weasil007]

Prudent for which stakeholder exactly?

Oz banks did pretty well in general throughout the GFC.............

LVR of itself isnt a risk indicator to capital if properly transferred to a mortgage insurer which is a proper third party.

BTW, the majority of loans are nothing like 95 % lends,and in general most brokers and bankers will avoid them and look for a min 90% lend

Well below 80 % LVR the risk to capital falls away, and this can be seen in some lenders pricing

ta
rolf

The banks did well through the GFC as a result of the FHBG incentives to all the plebs that went on to take such grants and obtain low LVR loans, isn't this now being born out in the losses we are seeing banks rack up

See link re ANZ in same thread.
As I've said before, we had developers, working with banks, providing back the FHBG value to the plebs after using the same FHBG as a deposit. This seems real smart...not

 

[Rolf Latham]

The banks did well through the GFC as a result of the FHBG incentives to all the plebs that went on to take such grants and obtain low LVR loans, isn't this now being born out in the losses we are seeing banks rack up

See link re ANZ in same thread.
As I've said before, we had developers, working with banks, providing back the FHBG value to the plebs after using the same FHBG as a deposit. This seems real smart...not

By doing well I don't mean profit, I clearly mean that most mainstream oz banks did fine through the gfc because they had ok and prudent lending practices and reserves that didn't wipe out their investors and clients.

In some ways Australia was lucky without a doubt, our lack of financial sophistication and remoteness (not just physical), and a decent regulatory environment meant that our banks and markets generally were a little more robust than other house of cards economies.

Whether you take the view that a 90 % lend is bad, or an 80 % lend is better, one will always be trumped by the view that all debt is bad, and all capital should be in the hands of government

Ta
rolf

Ta
rold

 

[Aaron_C]

Seems like the BOQ must have a special knack for locating these clients

http://www.heraldsun.com.au/busines...t-full-year-loss/story-e6frf7ko-1226488984786

Or are the remaining big 4 not that far behind

Bank of Queensland - they are the mother of bad loans. This is because they run a different model to traditional banks as they have a franchisee distribution rather than a branch/broker one. I've seen plenty of fraud go on through this. You could say the same thing goes on in the majors too but they have tighter credit policies since the death of lo-doc loans etc.

 

[8fold]

So getting back to the OP topic, I am looking at my next move being high yield outer metro (possibly Bris and Sydney) a la Nathan style. Does the 90% lend allow me to rapidly buy / renovate / reval / buy? I am very interested in this point as I remember Rolf quizzing Nathan some time ago about how he accumulated so quickly and the answer seemed to be around the lack of an LMI and hits the insurer was receiving? PT I know you say above you could concievably go forever using 90% lends but does this slow the rate you can accumulate?

I have about 900k (only around 200k of equity) worth of PPOR and one place in Bris which is relatively low yield and am looking to balance things up with some cashflow.

Thanks
Scott

 

[Rolf Latham]

So getting back to the OP topic, I am looking at my next move being high yield outer metro (possibly Bris and Sydney) a la Nathan style. Does the 90% lend allow me to rapidly buy / renovate / reval / buy? I am very interested in this point as I remember Rolf quizzing Nathan some time ago about how he accumulated so quickly and the answer seemed to be around the lack of an LMI and hits the insurer was receiving? PT I know you say above you could concievably go forever using 90% lends but does this slow the rate you can accumulate?

I have about 900k (only around 200k of equity) worth of PPOR and one place in Bris which is relatively low yield and am looking to balance things up with some cashflow.

Thanks
Scott

careful fwd planning is required as to what lender to use when and why, and as to what mortgage insurer and why. Not rocket science, but without doing this properly and from the start, you are in a spot of bother.

the main issue is getting the reval that you expect and getting the "cash" out

This is one time where a lender direct approach isnt really suitable, because you need to ascertain WHERE you need to go first, and its highly unlikely the NAB guy will tell you to go and see ANZ : )



ta
rolf

 

[Aaron_C]

So getting back to the OP topic, I am looking at my next move being high yield outer metro (possibly Bris and Sydney) a la Nathan style. Does the 90% lend allow me to rapidly buy / renovate / reval / buy?

90% allows you to accumulate quickly. However, that doesn't mean going for 90% lends multiple times in a row. That will kill you stone-dead.

 

[Fox89]

Instead of being a slave to the bank for most of your life ( taking out a 90% loan) has anyone managed to save and do it tough for a years and pay for a house in cash? does this have benefits?

 

[tobe]

so be a slave to their savings account for a few years while they save the full purchase price instead of the loans department?

I havent had direct experience with people buying property with saved cash, plenty of upgraders who took out a loan at first, paid it down, then used the increased equity to sell and buy again. But thats not cash.

i guess the advantages would be not being beholden to a lender. One of the disadvantages for investment property is a loss of tax benifits, and Id suggest a smaller group of cheaper properties to choose from.

 

[Aaron_C]

Instead of being a slave to the bank for most of your life ( taking out a 90% loan) has anyone managed to save and do it tough for a years and pay for a house in cash? does this have benefits?

Yes I know people who do this but they spend most of their time trying to avoid being scrutinised by the ATO. Take your pick - bank or tax man?

 

[DaveM]

Instead of being a slave to the bank for most of your life ( taking out a 90% loan) has anyone managed to save and do it tough for a years and pay for a house in cash? does this have benefits?

Paging China to the thread... China to aisle 3.

 

[The Y-man]

Spludgey,

We bought our first IP at max lend (95%) with LMI.

As the value of that property went up, we refinanced so that we could keep the LVR on IP1 at 80%, and drawing down enough so that along with any cash we had, we could make up a 20% deposit for IP2.... much easier in a fast moving market tho....

The Y-man

 

[VYBerlinaV8]

Instead of being a slave to the bank for most of your life ( taking out a 90% loan) has anyone managed to save and do it tough for a years and pay for a house in cash? does this have benefits?

Although possible, this is not something I would try for two reasons:
1) The interest on any savings will attract tax, and the rates are so low that in real terms you'd going backwards on saved funds.
2) You would be fighting inflation, rather than letting it help you. Buying then paying off means that your loan is reducing in real terms not only by principle payments but also by inflation, while the value of the property is rising. Also, any extra payments you make provide future benefit of less interest, and this benefit is not taxable.