IP2 Purchase - Cash Buffer vs LMI??

[JP888]

Hi All

I'm currently organising finance for my 2nd IP purchase. Budget is $450k - $500k.

I'm using equity for my deposit, but to do so, am paying my PPOR mortgage down using cash buffer funds from my offset account. I've narrowed it down to a couple of lenders with the help of my broker and now it's decision time. The question is, by how much do I pay down the PPOR.... and that's where my options/questions lie.

Cash Buffer vs LMI?? The more cash I put down, the less LMI I'm paying. But if I leverage up to 95-97% I'll be looking at quite substantial LMI. My main options are below:

- Keep in mind: Offset balance is approx $105k


Option 1

90% Lend
No LMI
$51k PPOR paydown from cash buffer

Option 2

95% Lend
$14k LMI
$42k PPOR paydown from cash buffer

Option 3

95% Lend
$34k LMI ($14k for 95% on PPOR and $20k for new 95% lend)
$21k PPOR paydown from cash buffer


I understand the aim of the accumulation stage is generally to borrow as much as possible and keep cash levels at a maximum, but where does the trade off point begin between cash buffer and LMI? If there is one at all?

I'm sure a lot of you have faced this same dilemma. If you could give your opinion and also back it up with reasoning it would be very helpful and greatly appreciated.

Cheers!
Jon

 

[D.T.]

LMI wins every time for me.
Top PPOR up to 90%
Buy new with 95%.

 

[Jamie M]

Hi Jon

How much of a cash buffer do you need to sleep at night?

If it were me, I'd be opting for option 1.

Cheers

Jamie

 

[Brady]

You need to provide more info IMO.

What is your cash buffer at the moment?

How much are you savings p.a?

How many more properties to you plan to buy in the next 1-5 years etc?

Do you need to use some of the cash to renovate etc which will inturn increase your cash flow / equity?


Paying LMI is fine... can often just be a cost of doing business. But no point paying it if it's not required.

 

[JP888]

Hi Jamie

I'd like to keep a minimum of $50k buffer, so Option 1 would place me right on that.

 

[JP888]

Hi Brady

Cash buffer is $105k pre any pay down.

Saving approx $20-30k a year (post purchase).

I'd like to continue accumulating in the next 1-5 yrs but that obviously depends on growth and cash flows/buffers, etc. That's why I'm wondering if it is common to take on greater LVR's and LMI's to continue accumulating at this stage, instead of potentially saving an extra year or two to regain the cash laid down for this purchase.

May also need $5-10k to renovate or improve as I'm aiming for an "add value" or future development property.

 

[Brady]

That should either answer your own question or get you thinking about it a bit more...


To help even more let's look at the cash flow side of things, because LMI is capitalised.

Option 1 $14,000 LMI @ 5% = $700 p.a with $9,000 kept extra

Option 2 $34,000 LMI @ 5% = $1,700 p.a with $30,000 kept extra

So the actual cost of taking on the LMI isn't really that significant to your cash flow, which could allow you to continue to be more aggressive with your purchases which hopefully will allow you to obtain more CG and future cash flow by buying more properties. Remember that LMI can be tax deductable as well. And biggest thing to remember is it's easier to harder on LMI earlier rather then later

 

[Peter_Tersteeg]

To help even more let's look at the cash flow side of things, because LMI is capitalised.

Option 1 $14,000 LMI @ 5% = $700 p.a with $9,000 kept extra

Option 2 $34,000 LMI @ 5% = $1,700 p.a with $30,000 kept extra

Umm, last time I looked most lenders (including CBA) won't capitalize LMI above 95% for investment property purposes. This means that the $34k would need to be paid from the loan - not added to the loan.

When you compare a 90% (with LMI capitalized) vs 95% (with LMI not capitalized), at certain price points it roughly equates to borrowing $2 extra and handing back almost $1 to the mortgage insurer.

In addition to the borrowing costs, the interest rates tend to increase when borrowing more than 90%. For example the CBA charges as much as 0.3% extra between the two LVRs on their professional package products across the entire loan.

The cost difference between a 90% loan and a 95% loan can be quite significant, both upfront and ongoing. There are exceptions to this, but the options are very limited and certainly not the most competitive.


The third problem with 95% loans is more subtle for investors. Accessing equity from a purchase finance point of 95% tend to be harder than when you initially borrow 90%. The margins are much tighter, top ups and refinances are much harder. There's no specific thing I can point to, but people relying on 95% loans always seem to have much more trouble accessing equity (even when only to 90%) than those who start at 90% in the first place.


My recommendation is to go with your first option. Far cheaper, far easier both initially and ongoing. $50k is also a fairly significant buffer.

 

[Brady]

Umm, last time I looked most lenders (including CBA) won't capitalize LMI above 95% for investment property purposes. This means that the $34k would need to be paid from the loan - not added to the loan.

When you compare a 90% (with LMI capitalized) vs 95% (with LMI not capitalized), at certain price points it roughly equates to borrowing $2 extra and handing back almost $1 to the mortgage insurer.

In addition to the borrowing costs, the interest rates tend to increase when borrowing more than 90%. For example the CBA charges as much as 0.3% extra between the two LVRs on their professional package products across the entire loan.

The cost difference between a 90% loan and a 95% loan can be quite significant, both upfront and ongoing. There are exceptions to this, but the options are very limited and certainly not the most competitive.


The third problem with 95% loans is more subtle for investors. Accessing equity from a purchase finance point of 95% tend to be harder than when you initially borrow 90%. The margins are much tighter, top ups and refinances are much harder. There's no specific thing I can point to, but people relying on 95% loans always seem to have much more trouble accessing equity (even when only to 90%) than those who start at 90% in the first place.


My recommendation is to go with your first option. Far cheaper, far easier both initially and ongoing. $50k is also a fairly significant buffer.

Pete from my understanding of the OP original post 95% was INC LMI don't think it was 95% + LMI

 

[Peter_Tersteeg]

Pete from my understanding of the OP original post 95% was INC LMI don't think it was 95% + LMI

Either way it's fairly academic. The cost of the loan skyrockets when you borrow more than 90%. Both Genworth and PMI 95% LMI standard premiums are over 150% that of a 90% premium across all pricing tiers (the difference has actually come down, it used to be closer to 200%).

The CBA and NAB charge premium interest rates for LVRs over 90% as do most of the second tier alternatives. ANZ and Westpac don't, but they're more expensive anyway. I suspect we'll see more 'rate for risk' in the future as well.

I consistently find that with 95% loans we're having to fight for every dollar, address every policy. 90% loans get approved easily and the borrowers always seem to be better off. They also tend to be able to buy properties more often and access more equity.

If you have to borrow 95% that's fine but I think people are better off sticking with 90% if they've got the choice.

 

[Brady]

Not disagreeing with you Pete fully aware of the costs difference between 90+LMI -95% INC LMI. It's one of the many things discussed at 1st interview with my clients. Getting under 90% gives you better rate, higher approval rate and a whole lot less LMI costs...

But I'm just assisting the OP as I do with clients break down the actual costs to see how relevant they are to him. As his future plans would play a large role is what would be best suited for him.

Being <90% is great if you have the choice so is <80%... but doesn't mean it's best for the client.

No 1 shoe fits all Pete.

 

[Terry_w]

Not enough info. Based on the above why not pay $100k off your home loan and then borrow 80% for the new property, avoid LMI completely?

You may not want to do this if the home will only be the home for a short period or if you are planning on buying a few more IPs quickly.

 

[Brady]

Not enough info. Based on the above why not pay $100k off your home loan and then borrow 80% for the new property, avoid LMI completely?

You may not want to do this if the home will only be the home for a short period or if you are planning on buying a few more IPs quickly.

In the original post he said 90% no LMI

 

[vbplease]

Option 1

90% Lend
No LMI
$51k PPOR paydown from cash buffer

Sorry if this is off topic, but just wondering how you can pay no LMI for a 90% lend? Doesn't it kick in at 80% +?

 

[Brady]

Sorry if this is off topic, but just wondering how you can pay no LMI for a 90% lend? Doesn't it kick in at 80% +?

Could be professional/medico waiver.

 

[JP888]

As Brady mentioned, it's a Professional waiver up to 90% LVR with no LMI.

 

[Qlds007]

90% No LMI is available for a variety of professions subject to a few basic criteria in relation to minimum income, professional body membership etc.

 

[Terry_w]

90% No LMI is available for a variety of professions subject to a few basic criteria in relation to minimum income, professional body membership etc.

Yes, I have just done a 90% LVR $1mil loan for a lawyer with no LMI. Huge saving there.

 

[Qlds007]

Yes not just lawyers Terry Engineers, Accountants, Vets etc etc

Getting some good quality enquiries from these professions.

 

[Terry_w]

Yes, I am doing a few more as well for Pharmacist and an accountant. Seems they are flexible on the min income requirments too.