IP#3 - 5% Deposit with LMI - Bad decision?

tbinvestor

tbinvestor

Hi, I recently purchased my second IP 4 months ago and i told myself at that point im not going to buy for another year! But as it happens I have stumbled across somthing i think is relatively cheap, in a good position and has great rental potenial. The problem is im not financially in a great position to buy...

If i were to offer a 5% deposit on a $300K deposit (judging that the vendor accepted this offer) and got LMI, would this be a bad investment choice?

I know this property had a rental potenial for around 350p/w and i do have another property which i could borrow equity against so that would also lower my borrowings.

I need some advice here guys, am i better off waiting till i do have a larger deposit and can avoid LMI or do i snatch up what i think could be a bargain in this climate?
 
Can you afford repayments, with financial breathing space if the rental amount doesn't live up to your expectations?
Pen
 
If it's a good deal by your criteria, the amount of borrowing doesn't really change that.

A lot's changed in the last 4 months. 95% loans are still available but extreamly difficult to get approved. The few lenders who are still doing them may take weeks to process it and often it gets declined at the last minute by the insurer.

I've had loans that have been approved by the lender, but then declined by the insurer. Everything stacks up, but the insurer simply decides that it's too risky and refuses to cover the loan. This is after weeks of fighting for the deal, showing the lender everything there is to know about the applicant, right down to the colour of the applicants underwear.

Make sure you have a finance clause in place, don't proceed without it.
 
This is the way I have bought the alst 5 properties.

I bought 2 this year at 95% LMI with LMI costs capitalised. I think this took the loan to 96.5% LVR.

From memory the the recent property I bought at Margate for 252K...the the loan was for 238k and limit was $3800.

Considering I can deduct the interest on $3800 and can deduct the amount over 5 years ($760 per annum) in tax. After tax I have gotten back about $1500. I has only costed me $2300 to get into the deal....money well spent.

The only issue make sure you can service it and that you are close to neutral in gearing. The real issue is serviceability...which will affect whether you can buy more property.

If you have a strong relationship and pushy enough....the 95% LMI deals can still happen.
 
As has been said, and I will reiterate, the LMI shouldnt be the decision maker.

CAn you afford it, is it a good deal ? The buying at 80 % in xx years time or buying now at 95 % isnt really that much different ?

ta
rolf
 
Thanks for all your suggestions, much appreciated.

I am on a middle to high income (day job) and my other two IP's are relatively high income so at the end of every month i usually end up with decent amount of money into my bank which in turn will service my IP#3+ its own rental income.

I mean i have never really totally understood why people avoid LMI like the plague, if were buying these properties which we know are going to do great in the future. I can depreciate my LMI over the next 5 years is it really going to affect me in at all from the outcome im looking for in the end?

I have done my figures, i can afford to service this loan easily i guess the next thing that worries me is if interest rate rise to 8-9% like they were when i purchased my first IP... can i afford to service all 3 IP's then? And the likelyhood of this happening is?
 
tbinvestor said:
I have done my figures, i can afford to service this loan easily i guess the next thing that worries me is if interest rate rise to 8-9% like they were when i purchased my first IP... can i afford to service all 3 IP's then? And the likelyhood of this happening is?
Click to expand...

I guess if you asked yourself that question, but the other way round 18months ago, would you have guessed the interest rates to drop below 5%?

I would personally say do you figures on 8-10%, see how that fits into your equasions and if it still stacks up then you have a top deal!
 
I'm a big believer in paying the lmi, IF you're a 41.5% or 46.5% tax payer AND you have a PPOR mortgage which you can reduce with the cash that you would have otherwise used for the deposit.

If you meet both of the above criteria, it's a no brainer, from a purely financial point of view.

Cheers
Jonathon
 
If the market tanks and your property tanks along with it - then it will have been a bad decision - and the D&G crowd warned you :rolleyes:.

If the market continues on its upward trend and your property along with it, you'll be a "genius" investor at best or the losers will say you are just "lucky" at worst.
 
If i want to get the ball rolling with this one i better start by going to see the lender to make sure they are willing to give me the loan, my second IP was approved without any trouble at all and that wasnt long ago.

I am going to make an appointment with the bank and see how things pan out from there, I actually think by the time my loan is approved this property will be sold, which means it wasnt men't to be...

Thanks for all your help :)
 
Long time lurker here...

I've been noticing people giving a big thumbs up to just paying for the LMI to save funds for other purposes; my question is how does this compare to LOCs being used to get a 20% deposit? I presume this is partially to save yourself from having to pay the LMI but does it not also introduce a slightly bigger risk in terms of interest rates?

Also to establish a LOC one needs something substantial to put down (ie a ppor) do they not?

Cheers
 
TSE,

LOC is still opportunity cost.

5% or less deposit is nice. want to use as much as can of the banks funds so i can move into next deal sooner.
 
I agree with Nathan....

I am working on a deal on the NSW Coast where I am negotiating a house for about 150k. It needs a major renovation (about 12K)....after which I can rent it out for 240 pw and it will be valued at 210-230k.

So coming back to LMI...it is just a cost of doing business. On the 150k purchase I will pay about $2800 in LMI which will be capitalised....chump change so I am only coughing up about and 12K for the deal ($7.5K deposit, $3.5 stamps, and $1k legals).

But from that I have build about $40k to 60K in equity. So the rate of return on my funds invested is around 180%-300%. :D

TseTse said:
Long time lurker here...

I've been noticing people giving a big thumbs up to just paying for the LMI to save funds for other purposes; my question is how does this compare to LOCs being used to get a 20% deposit? I presume this is partially to save yourself from having to pay the LMI but does it not also introduce a slightly bigger risk in terms of interest rates?

Also to establish a LOC one needs something substantial to put down (ie a ppor) do they not?

Cheers
Click to expand...

Nathan said:
TSE,

LOC is still opportunity cost.

5% or less deposit is nice. want to use as much as can of the banks funds so i can move into next deal sooner.
Click to expand...
 
Nathan said:
TSE,

LOC is still opportunity cost.

5% or less deposit is nice. want to use as much as can of the banks funds so i can move into next deal sooner.
Click to expand...

I'm waiting for the 100% deals to come back into fashion. I wander when that will be?? I want to use as little of my own money as I can.
 
Kim5 said:
I'm waiting for the 100% deals to come back into fashion. I wander when that will be?? I want to use as little of my own money as I can.
Click to expand...

100% deals will be back in fashion and freely available at about the same time whale-bone corsets are back in fashion and freely available.
 
Im in the same position as you. IP#3 and 95% loan. The cheapest I found was 5.7% with bank west? Can anyone beat this? Did you find anything more competitive than them?
 
There are a few lenders who will lend over 95% with better rates if you're an existing customer. There are also a few others who will look at 95% depending on your circumstances. Many of these have better rates and terms than BankWest.

Again I must stress that these deals can be pulled at the last minute. They can be difficult to get approved even for what would normally be a solid application.
 
sash said:
I agree with Nathan....

I am working on a deal on the NSW Coast where I am negotiating a house for about 150k. It needs a major renovation (about 12K)....after which I can rent it out for 240 pw and it will be valued at 210-230k.

So coming back to LMI...it is just a cost of doing business. On the 150k purchase I will pay about $2800 in LMI which will be capitalised....chump change so I am only coughing up about and 12K for the deal ($7.5K deposit, $3.5 stamps, and $1k legals).

But from that I have build about $40k to 60K in equity. So the rate of return on my funds invested is around 180%-300%. :D
Click to expand...

So the trip up on the weekend was worth it sash?;)

Regards JO
 
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