LMI - Friend or Foe?

[Peter_Tersteeg]

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

The LMI @90% for $360k is about $5k, but your math if wrong if you're looking at it over a 1 year term...

If you look at a $40k loan at 15% with a 1 year term, your total repayments would be a little under $46,000 for the personal loan over that year. Better to compare the two over a more realistic repayment scenario.

Assumptions:
30 year loan term for the property @ 6.5%
5 year term for the personal loan @ 15% (5 years is a common repayment schedule)
No extra repayments on anything, all loans are P&I (no way to compare the total cost if there's I/O components)

90% property loan scenario:
$360k loan + $5k LMI = $365k total
Repayments: $2,307/mth = $830,520 over life of loan.

80% property loan, 10% personal loan scenario:
First 5 years ($320k property loan + $40k personal loan)
Repayments: $2,022 + $951 = $2,974 / mth = $178,440 over 5 years
Next 25 years ($320k property loan)
Repayments: $2,022/mth = $606,600 over 25 years
Total cost over 30 years = $785,040

Saving of $45,480 over LMI scenario

Massive difference to the total cost. Much cheaper! You save $45k!

The saving is really by virtue of the accelerated payments in the 80/10 scenario during the first 5 years. Let's look at the scenario of accelerated extra repayments of a 90% + LMI loan for 5 years, than minimum P&I over the next 25 years...

Applying the Personal Loan repayment schedule to the LMI scenario:
Total monthly repayment available for first 5 years: $2,974/mth (from 80/10 first 5 years scenario). This is extra payments of $2974-$2307 = $667/mth for 5 years.
Use a loan of $365k @ 6.5% interest with extra repayments of $667/mth for the first 5 years. Then back to normal for the remainder of the term.
This schedule will pay the loan off in 20 years (use an "extra repayment" calculator to verify this if you want).
Saving 10 years on the loan @ $2,307/mth = saving of $276,840 from the 30 year 90% scenario.

Total cost of loan in this scenario is $830,520 - $276,840 = 553,680

This saves $231,360 on the personal loan scenario.




Ergophobia, I understand how you've come to your figures, but you're not comparing the two scenarios by the same criteria. You can choose to:

1. Apply the same repayments over the same schedule for the same time periods and save over $200k with LMI
-or-
2. Use the miminum repayments in each scenario and decide what the opportunity benefit of the extra cashflow of $667/mth over 5 years from the LMI scenario is.

If you compare the two fairly, the main reason you'd use a personal loan is probably because you don't qualify for LMI.

 

[Rolf Latham]

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 = $?

Please, lets get realistic and grounded, the repayment term of the personal loan............5 to 7 years


Not many people earn 200 k + a year.



The "Reusable" LMI premium might be say 6 k.

The reverse debt recycle cost of converting 40 k of deductible to non deductible approx 1000 a year each and every year.

ta'rolf

 

[Ergophobia]

If you look at a $40k loan at 15% with a 1 year term, your total repayments would be a little under $46,000 for the personal loan over that year.

come on now... I expet more from you than a simple interest calc

40k @ 15% 1 year term monthly repayments are $3,610.33 or $43,323.99 over 12 months costing only $3,323.99 in interest.

you also cant include principal payments as a cost, as they are building equity and arent tax deductable.

80+10 doesnt work out better if the personal loan term is more than 2 years.

Its not for everyone. We have simply diverted our regular savings into the personal loan which beats waiting another year to save up a 20% deposit. It is also cheaper than a 90% lend with LMI.

 

[Ergophobia]

The reverse debt recycle cost of converting 40 k of deductible to non deductible approx 1000 a year each and every year.

I dont understand what you are saying here.

 

[Rolf Latham]

I dont understand what you are saying here.

by repaying a tax deductible debt by 40 000 instead of repaying a non deductible debt, you have reduced the tax dedns by 2600 per year.

Apply your marginal tax rate to get end result of money lost each and every year ..................the LMI savings evaporate real quick, especially whne you look at the value of the loss compounded over time against a PPOR mortgage.


ta
rolf

 

[Rolf Latham]

It is also cheaper than a 90% lend with LMI.

if one ignores the actual longer term financial effects of the transaction then yes this is true.

But the real world doesnt work in little compartments.

If you analyse such a transaction in FUTURE value, where there is a choice to go 80 or 90, the band of people that would be better off would be EXTREMELY narrow.

ta
rolf

 

[Ergophobia]

by repaying a tax deductible debt by 40 000 instead of repaying a non deductible debt, you have reduced the tax dedns by 2600 per year.

Apply your marginal tax rate to get end result of money lost each and every year ..................the LMI savings evaporate real quick, especially whne you look at the value of the loss compounded over time against a PPOR mortgage.


ta
rolf

Good Point


Paying off the Personal Loan over 1 year is my plan B

Plan A is to do the 80/10 loan, a quick 5% reno to boost value by hopevully 15%, refinance at 80 and pay out the personal loan.

 

[Peter_Tersteeg]

come on now... I expet more from you than a simple interest calc

40k @ 15% 1 year term monthly repayments are $3,610.33 or $43,323.99 over 12 months costing only $3,323.99 in interest.

you also cant include principal payments as a cost, as they are building equity and arent tax deductable.

80+10 doesnt work out better if the personal loan term is more than 2 years.

Its not for everyone. We have simply diverted our regular savings into the personal loan which beats waiting another year to save up a 20% deposit. It is also cheaper than a 90% lend with LMI.

That bit was a very quick and simple calculation. Fair go, the remainder of my post took the better part of 30 minutes. This was a fair comparison of the outcomes using real figures and applying the same behaviours over the life of the loan.

If you're in a position to achieve afford over $3,300 per month in extra repayments then the argument becomes negligible either way; but I rarely see people who want to buy a $400k property and have a disposable income of $3k or more post purchase.

Most people on these sorts of incomes either by purchase a home worth $800k or they buy multiple investment properties and preservation of cash often becomes a priority as well. These requirements would likely change the figures later down the track to reduce disposable income regardless, which brings it back to a question of affordability.

My previous post indicates that a 90% loan is far more affordable in the first 5 years or so than a personal loan for the extra 10%.

In essence there's several reasons why brokers tend not to offer personal loans to cover low deposits:
1. In almost all cases they're financially far more expensive.
2. They have a substantial impact on affordability calculations which often comprimises the chance of obtaining the actual home loan.
3. Lenders generally won't accept a personal loan as evidence of a deposit. People in the branches do it from time to time, but they're often commiting fraud against their own credit department. The pay off for them is they meet their sales targets and collect their bonus.

In most cases the reason you'd do it is because you don't qualify for LMI. I suspect you understand why I'm stating this.

 

[tobe]

Its also usually an invalid purpose for a personal loan. ie if you walk into almost any bank and ask them for a personal loan and tell them its for the deposit on property you will get an automatic decline.

 

[Ergophobia]

That bit was a very quick and simply calculation. The rest of my post was a fair comparison of the outcomes using real figures and applying the same behaviours over the life of the loan.

If you're in a position to achieve afford over $3,300 per month in extra repayments then the argument becomes negligible either way; but I rarely see people who want to buy a $400k property and have a disposable income of $3k or more post purchase.

Most people on these sorts of incomes either by purchase a home worth $800k or they buy multiple investment properties and preservation of cash often becomes a priority as well. These requirements would likely change the figures later down the track to reduce disposable income regardless, which brings it back to a question of affordability.

My previous post indicates that a 90% loan is far more affordable in the first 5 years or so than a personal loan for the extra 10%.

In essence there's several reasons why brokers tend not to offer personal loans to cover low deposits:
1. In almost all cases they're financially far more expensive.
2. They have a substantial impact on affordability calculations which often comprimises the chance of obtaining the actual home loan.
3. Lenders generally won't accept a personal loan as evidence of a deposit. People in the branches do it from time to time, but they're often commiting fraud against their own credit department.

In most cases the reason you'd do it is because you don't qualify for LMI. I suspect you understand why I'm stating this.

I have set the loan term at 7 years to minimise the effect on servicibility calculation, but gone for variable so I can pay it off early, hopefully within a month of settlement if i can refinance.

I also dont want to get into a massive portfolio with a high lvr in the current climate, so the 80-10 strategy works well for me. If capital growth was assured, I would be pushing the LMI option. But then telstra made sure I couldnt progress with that

but back to the original topic of LMI being a friend or foe, I just wanted to demonstrate that there are other options to LMI and for people to think outside the box.

 

[Ergophobia]

Its also usually an invalid purpose for a personal loan. ie if you walk into almost any bank and ask them for a personal loan and tell them its for the deposit on property you will get an automatic decline.

not so... If they will give you an unsecured personal loan to blow on a trip to vegas or a lavish wedding they are more than happy to lend to someone who is financially responsible.

 

[tobe]

I think youll find your stated purpose recorded at the bank end is something diferent to 'deposit for property purchase', but lets agree to disagree, Im just a broker in the industry for over 10 years.

I do agree its odd they are fine with the las vegas trip, and not as a deposit.

I guess the thinking is their liability is finalised once you have blown the las vegas money, but they are still liable years down the track if you (or the mortgage lender) sue them because they let you borrow the deposit and you now cant afford the repayments. Can you see the current affairs story?

 

[Rolf Latham]

I have set the loan term at 7 years to minimise the effect on servicibility calculation, but gone for variable so I can pay it off early, hopefully within a month of settlement if i can refinance.

One upside for you is that the "cash out" rules are much lighter at 80 than 90.

ta
rolf

 

[Ergophobia]

In most cases the reason you'd do it is because you don't qualify for LMI. I suspect you understand why I'm stating this.

aww come on... whats wrong with a casual worker borrowing money for a purchase using a HDT with a default listed on his credit file? These LMI companies need to get with the times

 

[Marty McDonald]

I think youll find your stated purpose recorded at the bank end is something diferent to 'deposit for property purchase', but lets agree to disagree, Im just a broker in the industry for over 10 years.

I do agree its odd they are fine with the las vegas trip, and not as a deposit.

I guess the thinking is their liability is finalised once you have blown the las vegas money, but they are still liable years down the track if you (or the mortgage lender) sue them because they let you borrow the deposit and you now cant afford the repayments. Can you see the current affairs story?

Agree 100% it is not allowed. You also can't borrow for business purposes.

 

[Peter_Tersteeg]

aww come on... whats wrong with a casual worker borrowing money for a purchase using a HDT with a default listed on his credit file? These LMI companies need to get with the times

When they do, I'm sure they'll also send some flowers with wine to celebrate your new purchase. Delivered by a model in a skimpy bathing suit.

 

[Ergophobia]

I knocked up this spreadsheet to compare 80+10 V 90+LMI over 1 to 7 year terms... it turns out that 6 years is about even.

 

[Rolf Latham]

oh gosh

when I did my most recent Self Development Psych Course they said that many Humans' biggest failing was one thing..........just ONE thing, and this one NEED has started wars, broken up families, and is the NUMBER one reason why most of us cant grow............................


Anyone wanna have a guess

ta
rolf

 

[Ergophobia]

Ergophobia?

 

[Ergophobia]

This saves $231,360 on the personal loan scenario.

I only just got my head around this while on the bus on my way home from work. Great post!

I guess the flaw in my logic is that it's a convoluted way of saying an 80% IO Loan is cheaper than a 90% IO Loan