Avoid LMI or not?

[New_Investor]

Hi There,
I am a new investor, just bought my 1st investment property and i borrowed 80%, and I used my house equity to pay the 20% deposit.

Now, I am thinking about buying my 2nd IP, my buyers agent is advising me to borrow 90% and pay mortgage insurance, and keep some equity to buy my 3rd property.

At the same time, my mortgage broker advised not to pay LMI, as I still have equity to cover the 20%. and do not pay extra money that i can avoid. and if i need to borrow more, she can work this out.

I am a bit confused, not clear based on what the bank will approve my 3rd property, as my income is not expected to double in the next year. and I want to use the equity built in the IP's to secure the next one.

I would appreciate your help and advice.

Thanks
Ram

 

[D.T.]

I like lmi, allows the equity to be spread thinner and more properties bought.

Your strategy may differ though.

 

[Peter_Tersteeg]

You have the equity to avoid LMI for the next purchase. If this is intended to be your only purchase, then by all means avoid LMI. It's money you'll never get back.

If you intend to purchase more property than the immediate purchase, it may be worth considering using LMI to leverage your equity further. If your strategy will require LMI at some point, it's better and easier to use it sooner rather than later.

Whilst you might be able to go back later and access the extra 10% you put in up front, there's no guarantee of this. Depending on the lender being recommended, accessing your equity as cash can be tricky when there's LMI involved.

Whilst on this topic, you also need to consider if the lender being recommended is going to be suitable for a longer term strategy, rather than just a cheap deal now. I've seen a number of people in the last few months who have been hamstrung by brokers making recommendations of lenders that look cheap, but don't meet peoples longer term objectives. This tends to cost a lot more in the long run (and the lender isn't as cheap as advertised either).

 

[Jamie M]

Hi Ram

It all comes down to your available equity and tolerance to risk.

If you've got loads of equity and can easily come up with the 20% deposit and costs on the next couple of purchases than I'd tend to agree with your broker - it doesn't make much sense copping LMI now if it can be avoided.

Even if the available equity only covers the 20% deposit and costs on the next purchase - I'd still be inclined to dodge LMI and use a lender that will allow you to borrow up to 90% against that property later on if required.

Cheers

Jamie

 

[Redom]

Hi there,

You can ask your broker on whether she thinks you'll be able to purchase a third property based on your current income. You can even ask her to map out a journey to 5th/6th/Nth property using some assumptions. It will help you formulate a plan, and then you can execute the plan. You may be surprised how much you can borrow at current rates.

In terms of whether to pay LMI or not, this will depend on your strategy. By the sounds of it, you're accumulating IPs quite quickly. If you intend on continuing this, then it may be best to purchase with 10% deposits. This will allow you to grow a larger asset base.

Perhaps ask your mortgage broker why she recommends 80% - it could be because obtaining an LMI loan may be more difficult in your scenario.

Pete makes a great point about picking the right lender, not the cheapest.

Cheers,
Redom

 

[Rolf Latham]

Generally I would not take structure or credit advice from a buyers agent unless they are really caress your finances and goals and are doing finance on a regular basis

Ta

Rolf

 

[New_Investor]

New Investor

Thanks Guys, your responses are amazing.

I am planning to buy more IP's. I am currently with CBA with 4.85% variable rate, and I understand that the rate is not everything.

I am going to sit with my broker today, and with my buyers agent tomorrow to discuss my strategy and get their ideas / plans on how to acheive this.

I am really happy with this forum and the amazing posts and responses i got from here. and I will share the outcome of my meeting's results soon.

Thanks
Ram

 

[Shahin_Afarin]

Going LMI early is very important.

Its better/easier to go LMI now than to go 80% and then top up in LMI territory.

Also i'm not about other brokers but I get a feel from credit across all lenders that things are tightening up with regards to equity releases. So as I always say try and pull out as much money as you can when you can or borrow more (and use less cash for purchases) because you just don't know how lenders' appetite may change in the future.

People think its easy to just go to the bank and pull out chunks of money. Its not.

Having said that LMI may not suit everyone so horses for courses.

 

[Greg Reid]

Ram,
As others have said, it depends on your goals and time table.
If you are just looking to add only one more IP, then why incur an additional expense of LMI? If you are building a portfolio over time, then consider what your financial position is and whether minimizing your use of own funds/equity is worth it.

I would suggest a couple of things to consider:

• Use different lenders for each IP purchase, reasons for not using one lender are available on other posts.
• If you are going to use LMI, consider only going to an 88% LVR, LMI hits another band > 88% and is proportionally more expensive for the benefit gained. Also some lenders have DUA under 90% so you may get approval without having to go through the additional MI scrutiny.
• I would borrow the higher amount/LVR now as it can be difficult to extract equity above 80% from many lenders or they have a cap on what they will release as equity.
• LMI is deductible over 5 years to an investor.

Good luck with it.

 

[Redom]

Also i'm not about other brokers but I get a feel from credit across all lenders that things are tightening up with regards to equity releases. So as I always say try and pull out as much money as you can when you can or borrow more (and use less cash for purchases) because you just don't know how lenders' appetite may change in the future.

Agree with you Shahin - not surprised there'll be some tightening in this area of policy as lending ramps up. IMO it'll only get harder into 2015.

Cheers,
Redom

 

[ZachAnSel]

The best thing in life for property investment is LMI

 

[MoneyNverSleeps]

Hey everyone,

Newbie here so please allow me some leniency if I happen to sound a bit fresh!

So I've just started to dabble in property investing not long ago; bought my first investment property about 6 months ago using 20% deposit which is made up of half equity from family home and half savings to avoid LMI. Family home was purchased April 2013 also with 20% deposit cash and is under my mother's name. I'm in the process of looking to purchase my next IP (most likely in Brisbane) and have 2 options:

1) Increase the LVR of either or both properties from 80% -> 90%: this will give me approximately $120K in extra equity to play around with, however, this will incur LMI costs on both properties totaling $20k or so which brings the final figure down to just over $100k. Furthermore, at current interest rates, I will also be paying an additional $6k in interest per year for both properties. This will also have the knock-on effect of turning my investment property from a neutrally geared position to a negatively geared one.

2) I am currently awaiting a pay-out from my business partner in my last business venture which did not work out. The pay-out amount is approximately $100k and I expect it to come through early next year, however, this is no guarantee and could take longer to complete (I stand to gain 12% interest p.a. until the money hits my account however). The upside of using this source of funds to fund my next property purchase vs option 1 is obviously the $20k LMI savings right off the bat as well as the additional $6k per year in interest. However, as mentioned above, this MAY drag out a bit longer which means I will not have access to the funds as easily or timely as I do from option 1. I do want to acquire the next property in Brisbane asap to capitalize as much as possible on the upswing which is quickly coming and this option can potentially delay me and cause a loss of opportunity.

Another consideration to add to the mix: I am looking for a new business venture to get stuck into at the moment (likely a franchise and will be going 50/50 with a new business partner) and will need the funds to invest in setting up once I do. I am considering taking a business loan secured against the properties acquired if I do not have enough cash or if I have used the pay-out for other purposes i.e. to purchase another investment property. However, this will probably be more challenging as I will have to come up with a solid business plan and forecasts good enough to convince the banks to lend me the money and there's always a chance that they will turn me down as I have so little equity in the properties...

At this point, I'm leaning towards option 1 but the $20K in LMI really stings and is acting as a major deterrence. I need a couple votes of confidence to give me the push I need to go down this path.

What are your thoughts? Please feel free to be a frank and honest as possible! I'm here to learn as much as possible in as little time as possible

 

[Brady]

Also i'm not about other brokers but I get a feel from credit across all lenders that things are tightening up with regards to equity releases. So as I always say try and pull out as much money as you can when you can or borrow more (and use less cash for purchases) because you just don't know how lenders' appetite may change in the future.

People think its easy to just go to the bank and pull out chunks of money. Its not.

It's ALWAYS easier to get money when you don't need it. Take it when you can.

 

[Redom]

Hey everyone,

Newbie here so please allow me some leniency if I happen to sound a bit fresh!

So I've just started to dabble in property investing not long ago; bought my first investment property about 6 months ago using 20% deposit which is made up of half equity from family home and half savings to avoid LMI. Family home was purchased April 2013 also with 20% deposit cash and is under my mother's name. I'm in the process of looking to purchase my next IP (most likely in Brisbane) and have 2 options:

1) Increase the LVR of either or both properties from 80% -> 90%: this will give me approximately $120K in extra equity to play around with, however, this will incur LMI costs on both properties totaling $20k or so which brings the final figure down to just over $100k. Furthermore, at current interest rates, I will also be paying an additional $6k in interest per year for both properties. This will also have the knock-on effect of turning my investment property from a neutrally geared position to a negatively geared one.

2) I am currently awaiting a pay-out from my business partner in my last business venture which did not work out. The pay-out amount is approximately $100k and I expect it to come through early next year, however, this is no guarantee and could take longer to complete (I stand to gain 12% interest p.a. until the money hits my account however). The upside of using this source of funds to fund my next property purchase vs option 1 is obviously the $20k LMI savings right off the bat as well as the additional $6k per year in interest. However, as mentioned above, this MAY drag out a bit longer which means I will not have access to the funds as easily or timely as I do from option 1. I do want to acquire the next property in Brisbane asap to capitalize as much as possible on the upswing which is quickly coming and this option can potentially delay me and cause a loss of opportunity.

Another consideration to add to the mix: I am looking for a new business venture to get stuck into at the moment (likely a franchise and will be going 50/50 with a new business partner) and will need the funds to invest in setting up once I do. I am considering taking a business loan secured against the properties acquired if I do not have enough cash or if I have used the pay-out for other purposes i.e. to purchase another investment property. However, this will probably be more challenging as I will have to come up with a solid business plan and forecasts good enough to convince the banks to lend me the money and there's always a chance that they will turn me down as I have so little equity in the properties...

At this point, I'm leaning towards option 1 but the $20K in LMI really stings and is acting as a major deterrence. I need a couple votes of confidence to give me the push I need to go down this path.

What are your thoughts? Please feel free to be a frank and honest as possible! I'm here to learn as much as possible in as little time as possible

Heya, no leniency required, SS'rs arent out to bite (most of the time!)

Hmm most pro's prefer using 'equity' instead of cash to fund future property purchases. This will mean option 1. The reason is the equity you borrow against is deductible. However, you are paying ~20k in LMI because of it. Its deductible over 5years though. You could whip a quick spreadsheet and work out the difference between the two approaches.

If your cashing up in a month or two, you could easily wait for it. Maybe the market will boom, but in such a short period, its quite unlikely to go that far.

You could also consider purchasing at 90% LVR with the 120k cash, and purchase 2 properties (or hold cash).

Cheers,
Redom

 

[MoneyNverSleeps]

Heya, no leniency required, SS'rs arent out to bite (most of the time!)

Hmm most pro's prefer using 'equity' instead of cash to fund future property purchases. This will mean option 1. The reason is the equity you borrow against is deductible. However, you are paying ~20k in LMI because of it. Its deductible over 5years though. You could whip a quick spreadsheet and work out the difference between the two approaches.

If your cashing up in a month or two, you could easily wait for it. Maybe the market will boom, but in such a short period, its quite unlikely to go that far.

You could also consider purchasing at 90% LVR with the 120k cash, and purchase 2 properties (or hold cash).

Cheers,
Redom

Thanks for the reply! Sorry could you please elaborate on the tax deductibility bit? Are you saying the LMI is deductible or the equity?

On second thoughts, $20k is a decent chunk! I could avoid this if I go with option 2 -> wait for the cash payment use that as deposit towards the next purchase (or 2!) and take out a business loan for my next business venture against my property portfolio which by that time should have at least 3 properties. The interest rate for the business should be a few points higher than the home loan rate but I save the $20K on LMI so it still puts me in a superior financial position.

HOWEVER, as mentioned above, the pay-out is NOT guaranteed to come in a month or two and could drag out further. This is another risk I must consider!

Damn I think I've just officially confused myself further lol