LMI - Friend or Foe?

[parlayman]

Hello,
Say, this is the situation.
Total loan is $360K secured against PPOR which is currently valued at $470K.
Loan 1: $301K with 100% offset
Loan 2: $59K redraw (reserve for IP deposit and expenses)

Say we are purchasing an IP where we can only afford 10% of the deposit given that we only have $59K to use (Loan 2). This means LVR will be at 90% and therefore will incur LMI.

Broker is saying why pay LMI if you can cross the IP on PPOR and make LVR at least 80%. Now, every time I read about cross-security it seems to be a no-no.

In this case, isn't paying the LMI not totally a bad thing? It's like using it as a leverage to enter into an IP - not to mention it will be a deductible debt as well.

Also, there is plan to sell the PPOR in a year or so. Isn't this plan a good enough reason not to cross it with the IP?

Thanks for all your inputs. Much appreciated.

 

[Marty McDonald]

Hello,
Say, this is the situation.
Total loan is $360K secured against PPOR which is currently valued at $470K.
Loan 1: $301K with 100% offset
Loan 2: $59K redraw (reserve for IP deposit and expenses)

Say we are purchasing an IP where we can only afford 10% of the deposit given that we only have $59K to use (Loan 2). This means LVR will be at 90% and therefore will incur LMI.

Broker is saying why pay LMI if you can cross the IP on PPOR and make LVR at least 80%. Now, every time I read about cross-security it seems to be a no-no.

In this case, isn't paying the LMI not totally a bad thing? It's like using it as a leverage to enter into an IP - not to mention it will be a deductible debt as well.

Also, there is plan to sell the PPOR in a year or so. Isn't this plan a good enough reason not to cross it with the IP?

Thanks for all your inputs. Much appreciated.

Don't cross especially if selling.

 

[Rolf Latham]

Hello,
Say, this is the situation.
Total loan is $360K secured against PPOR which is currently valued at $470K.
Loan 1: $301K with 100% offset
Loan 2: $59K redraw (reserve for IP deposit and expenses)

Say we are purchasing an IP where we can only afford 10% of the deposit given that we only have $59K to use (Loan 2). This means LVR will be at 90% and therefore will incur LMI.

Broker is saying why pay LMI if you can cross the IP on PPOR and make LVR at least 80%. Now, every time I read about cross-security it seems to be a no-no.

In this case, isn't paying the LMI not totally a bad thing? It's like using it as a leverage to enter into an IP - not to mention it will be a deductible debt as well.

Also, there is plan to sell the PPOR in a year or so. Isn't this plan a good enough reason not to cross it with the IP?

Thanks for all your inputs. Much appreciated.

Hi PM

Your broker is a clown !

rf lazy broker .

If u have the equity for no lmi with cross, you have the equity without cross ( except in some rare circumstances)

Happy to take a call From Bozo Broker to explain , though I think he/she has their numbers wrong on their calculator too.

Number for Bozo to call below

ta

rolf

 

[Bigtone]

Hi PM

Your broker is a clown !

rf lazy broker .

If u have the equity for no lmi with cross, you have the equity without cross ( except in some rare circumstances)

Happy to take a call From Bozo Broker to explain , though I think he/she has their numbers wrong on their calculator too.

Number for Bozo to call below

ta

rolf

difference between lazy and incompetent rolf

if branchies and 90% of brokers had a clue what they were doing u would not have the business u do.

it is frightening that 'professionals' r setting up people this way

 

[Aaron_C]

time to get a new broker parlayman...lol

 

[Rolf Latham]

difference between lazy and incompetent rolf

if branchies and 90% of brokers had a clue what they were doing u would not have the business u do.

it is frightening that 'professionals' r setting up people this way

yes but......

they have the Diploma and the MFAA tag, so what the Heck are we teaching people..............its not that bloody hard or complex !

ta

rolf

 

[Aaron_C]

yes but......

they have the Diploma and the MFAA tag, so what the Heck are we teaching people..............its not that bloody hard or complex !

Education is one thing....but experience is the true barometer of how good someone is.

 

[Bigtone]

yes but......

they have the Diploma and the MFAA tag, so what the Heck are we teaching people..............its not that bloody hard or complex !

ta

rolf

teaching them how to fill in the compliance docs that says they did not give them an unsuitable loan which may be true on serviceability and price but completely unsuitable on what is often the most important factor, structure, which never seems to be mentioned.

 

[Jamie M]

yes but......

they have the Diploma and the MFAA tag, so what the Heck are we teaching people..............its not that bloody hard or complex !

ta

rolf

I'd say some would simply be lazy and couldn't be bothered doing the equity increase on one property and purchase on the other - obviously at a huge detriment to their client.

There would also be a lot who just have no clue that they can avoid cross coll and/or simply don't understand the issues it presents down the track.

Cheers

Jamie

 

[parlayman]

Again, thanks for all the inputs.
I suppose in this particular scenario, LMI is a friend that will allows us to step into an IP.
Would rather save my equity that I can realise into profit when the PPOR is sold in the future.

 

[Peter_Tersteeg]

I've run the figures as well. If I'm reading your first post correctly, crossing won't help you avoid LMI. You'll actually pay a lot more than you will if you don't cross.

Even if the figures were different, there's still no reason to cross. The worst part is that the broker could likely make even more money by avoiding cross-collateralisation. (It really is possible to occassionally get paid for doing the right thing).

Your broker may be lazy, but I can assure you that there is definitely a substantial level of incompitence there as well.

 

[Mick C]

^^ agree.

You don't need to cross, more like DON"T cross...as Jamie mentioned, he/she simply don't understand the issues it presents down the track.....

Save on the LMI and hassle and give any of the 5 brokers above a call and get them to do the equity release.

 

[parlayman]

Sorry for being so naive here....How is the equity release done? Given our figures above and the IP costing $335K, would it be better paying the LMI and "reserving" the equity of our PPOR so we can realise it as a true profit when we sell it in the future?

 

[Ergophobia]

Do some calcs comparing the cost of a 90% loan with lmi and an 80% loan with a 10% personal loan.

I saved about 5k using the 80+10

Some smart brokers should start offering this style loan setup

 

[Aaron_C]

Hmm LMI is fine and all unless you have bad credit/low servicing. Then you have to go for the 80% + 10% personal loan.

 

[Rolf Latham]

Do some calcs comparing the cost of a 90% loan with lmi and an 80% loan with a 10% personal loan.

I saved about 5k using the 80+10

Some smart brokers should start offering this style loan setup

lets have a quick look at the actual numbers.................if youd be willing.

I have been through the numbers many times and have invariably found that for investment purposes, where a client has a home loan as well, the Personal Loan option is a shocker over time when you look at the actual cost of the transaction.

The biggest difference isnt the LMI fee vs the Interest on the Personal loan.

Its the cashflow impact, the reduction of tax deductible debt, AND people forget that LMI, while a one off cost, can be further leveraged for a smallish top up fee later on .

"save" 5 k and pay + x times that over time

ta
rolf

 

[Mick C]

From your OP; this is what i gathered.
1. Your PPOR is worth - $470k.
2. Your total loan (with the redraw taken out?) = $360k ( 59 + 301)
3. Your purchase price for the new place is $590,0000

Current LVR stand at 76%.


So even if you do cross, you still need to pay LMI, but the LMI will be calculated on your total loan amount"crossed amount" - which is far more hefty then paying LMI on a single loan with a equity release.

If your broker is smart enough + have the time to balance it out and find the optimum point in term of the cheapest LMI price -- ie maybe 83% for the PPOR and 85% for the IP etc...rather then 80/90


Lastly since your planning on selling your PPOR in 1 years time, all your doing is delaying any "possible" LMI you may need to pay later down the track.

My interruption on your situation /numbers may be wrong

Regards
Michael

 

[parlayman]

2. Your total loan (with the redraw taken out?) = $360k ( 59 + 301)
3. Your purchase price for the new place is $590,0000

Hi Michael,
The redraw of $59K is available for use. It's where deposit + costs will come out.
And the IP purchase price is actually $350K.

Thanks.

 

[Mick C]

Hi Michael,
IP purchase price is actually $350K.

Thanks.

ohh no wonder....
thought it was 590k because you mentioned 10% deposit with the 59k.....

If that's the case. you dont need to cross at all....you have enough equity to meet the 20% deposit required ( presuming you have enough for stamp duty as well).

You have another $16,000 that you can draw out as an equity release, + still avoid LMI.

 

[Ergophobia]

lets have a quick look at the actual numbers.................if youd be willing.

ok lets say he has 60k for 10% deposit and 5% costs, meaning at LVR 90 he will be looking for an IP for 400k.

What is the LMI premium on a 360k loan at 90%?

Compare the costs excluding principal:

80/10
I/O Loan 320k @ 6.5% for 1 year = $20,800.00
Interest on P&I Personal Loan 40k @ 15% 1 year term monthly payments = $3,323.99
Total = $24,123.99

LVR 90
Loan 360k @ 6.5% for 1 year = $23,400.00
LMI = $?
Total = $?