Are you always better off avoiding LMI if you can?

[Bantam Roosta]

Most serious investors appear to borrow more than 80% for subsequent IPs, but this is normally done by using equity from elsewhere, not paying LMI, I believe.

I'm looking at about the $350k purchase mark, have $35k LOC to access and approx $70k cash. My intent was to use the LOC first and use the cash for the rest of the deposit and other costs. Does this sound like the best option?

I just wanted to throw open the question, to make sure that I've got my thinking right. 90% LVR at this price would cost about $6k in LMI. Is there any reason you would keep your powder dry and capitalise the LMI, or would this be as stupid as it sounds to me?

Besides the extra $6k in LMI, I assume getting a loan would also be more difficult then having the full 20% deposit available?

BR

 

[Singo]

Going slightly lower than 90% (88-89) may save some LMI.

 

[D.T.]

If it were me, and depending on which state, might take you that 35k in 5% deposit + LMI + SD + Legals + Misc

You then have a very good cash buffer to use for covering some unkowns, or giving it a bit of a reno, or holding through NG period (if its not PG already).

All of my ppor and ip purchases (4 so far) have all been 5% deposit (either from cash or from equity, source is unimportant), so this is what I'm comfortable with. To each his own

 

[Rolf Latham]

depends on lots of things some of which are

Capacity to borrow further
A want to borrow further

no point stumping up for LMI if you never want to buy another property - ever, and you have good cash buffer after the purchase

Im a big fan of lmi where it suits

ta
rolf

 

[Terry_w]

2 schools of thought

1.. Borrow as much as you can early on and keep as much cash/LOC as you can for further properties. If they are growing then getting more quicker will aid the compounding effect.
LMI is deductible over 5 years, generally.
If it is capitalised you are not paying for it upfront but being able to claim a deduction

2. LMI is expensive and putting in more will mean saving money.
you can always increase a loan to 90% later...

 

[Shahin_Afarin]

If you are going to go LMI - make sure its a suitable longer term lender because LMI is not transferrable and the LMI credit that you have up your sleeve is very important. The last thing you want to do is refinance at a later stage and lose the LMI credit.

 

[Jamie M]

It all comes down to your longer term plans, risk profile and amount of cash/equity you have it your disposal.

I have some clients who prefer to utilise LMI and buy more properties with less. On the flipside, I have other clients who prefer to not go above 80% on any of their purchases.

There's no perfect answer - it all comes down to the individuals circumstances.

Cheers

Jamie

 

[geoffw]

You can sometimes save LMI by stumping up a small amount of cash.

The LMI is usually stepped. So there may be one amount say from 88-89.9%, then a big step 90-91.9%.

So reducing the loan say from 90.2% to 89.9% could save a fair amount.

In one property I used a Visa cash advance of around $3000 to save $1000. I knew that I could repay that amount in just a few months.

Conversely you could "borrow up". It may not cost a lot more to borrow 89.9% than 88%.

 

[Rolf Latham]

conversley

Borrow money when you dont need it.

many lenders are squemish with cash out above 80 %, and the credit score tends to get hammered.

We have found stuff that supposed to be routine, can quickly turn inot, heck what happened here

ta
rolf

 

[Peter_Tersteeg]

You've currently got enough cash between your savings and the LOC for one purchase at 80%, plus the purchase costs (stamp duty, etc). You'd have about $10k-$15k change from your cash resources.

Alternately you can purchase 2 properties worth $350k (plus purchase costs) with your current cash resources. You'd probably have to find another $5k to get there.

Across 2 purchases you'd probably have to pay about $12k in stamp duty. The interest rates probably wouldn't be as good either (about an extra 0.10% above what you might otherwise get), but you've purchased an extra property.

It's up to you to decide which is more worthwhile for your plans.

 

[Bantam Roosta]

As usual, thank you all for broadening my views. I now have a much greater appreciation of this space.

Also, something I just thought of, as this IP will be in my name alone for the tax benefits, the cash (in offset) and LOC is against a joint IP with my wife. By maximising the new loan and keeping the reserves against the joint loan, I would also be maximising possible tax deductions.

So much number crunching to do...

BR

 

[Aaron_C]

LMI - good for loans under $500k. Once you get above that it's a bit too much for my taste.

 

[dantab]

As an example:

I have my current PPOR (which will become an investment property in the next couple of years): Value $575K and debt of $400K.

I am settling on an off-the-plan NRAS purchase in the next couple of months. It is worth $325K and I have already paid a 5% deposit ($16,250).

I want to purchase more property in the short to medium term.

Should I utilise LMI for this property (borrowing either at 90%/95%), use the equity in my current PPOR to borrow at 80% or use cash to borrow at 80% (I have sufficient cash)?

 

[Rolf Latham]

NRAS is somewhat limited to 80 and rare lenders will do 90

dunno anyone that will do 95

One would need a bit more info, but a general rules would be that if you have PPOR debt, dont use tax paid cash for iP use

ta
rolf

 

[Terry_w]

I wouldn't use cash.

First thing to do is to make sure you have the ability to settle on the off the plan property. You don't want to risk this as you are locked in.

I would then be inclined to use LMI as your equity is not so high.

 

[dantab]

Thanks Terry. Borrowing ability isn't an issue.