LMI or not?

[mcarthur]

Problem is howto finance first IP...

I don't think it matters about PPOR, but the info is:

- PPOR is at 80% LVR, Commbank, in my name only.​

- PPOR is being reno'ed, so can't do a valuation at the moment (eek if a valuer looked inside and saw missing kitchen, tornup bathroom, etc).
​

- PPOR reno budget coming from offset - about $60k in the next 6 months.​

LVR scenario:

Lets say I had another $125k available in the offset that I wanted to put into an IP.

Lets say I wanted to go for relatively quick CG to recycle on a reasonably aggressive strategy, so I want to buy in a pretty central location: so I'd like to purchase a $500,000 IP.
I'll assume 5% costs which is $25,000.

At 80% LVR, I would put up $100,000 + $25,000 = $125,000, and the loan $400,000.
At 82% LVR, it would be $115,000 cash, loan $414,000 (assuming LMI 1%).
At 84% LVR, it would be $105,000 cash, loan $425,500 (assuming LMI 1.3%).
At 86% LVR, it would be $95,000 cash, loan $437,300 (assuming LMI 1.7%).
At 88% LVR, it would be $85,000 cash, loan $451,000 (assuming LMI 2.5%).

So the sweet spot (assuming LMI's I used are about right?) seem to me to be an 84% LVR, putting in $105,000 cash, leaving $20,000 for reno or to leave in PPOR offset until next IP.

However, I *could* put in enough for 80% LVR and have no LMI.

I assume if I want to build fast, I'd go to a higher LVR to have cash available for the next IP (and toss and turn at night ). eg. I could go 88% and have $40,000 for another immediate/near IP start.
​

Question: I believe there may be other disadvantages to going *any* LMI though - such as problems transfering loans between banks.

If you were doing your first IP, are there any (other) adv/disadv of going >0 LMI early on in a moderately aggressive strategy?

 

[jpcashflow]

Hi

Hi,

Using LMI has pros and cons but if you are planning to hold the property for a 5 year plus period then paying LMI is no issue. Reason being you may be entitled to claim LMI over a 5 year period on a pro rata basis.

 

[mcarthur]

Hi,

Using LMI has pros and cons but if you are planning to hold the property for a 5 year plus period then paying LMI is no issue. Reason being you may be entitled to claim LMI over a 5 year period on a pro rata basis.

Hmm, thanks for that. I didn't know.
I thought that the LMI was a borrowing cost and could be immediately deducted, that is that the interest payments on the LMI were 100% deductible.
Are you saying that not only the interest payments on LMI are deductible, but the LMI itself is after 5 years?

Lets assume I've paid $11,000 of LMI to get an 88% LVR in my example.

Do you mean that If I hold the property as an IP for 5+ years, can I

• start claiming a tax deduction of the LMI amount after 5 years?
  If I paid $11,000 LMI, what could I claim after 5 years?
• on sale any time after 5 years, I could add the original LMI into the cost base?
  But I can't do that before 5 years?

Also, are there any benefits to paying the LMI in cash vs adding it to the loan?
Clearly adding it to the loan increases the actual LVR as far as pulling out equity later, and increases the interest payments (but not by much).
I assumed that one benefit to adding it to the loan means the interest is deductible (benefit) whereas paying in cash upfront means there's no interest to deduct.

 

[Jess Peletier]

Hmm, thanks for that. I didn't know.
I thought that the LMI was a borrowing cost and could be immediately deducted, that is that the interest payments on the LMI were 100% deductible.
Are you saying that not only the interest payments on LMI are deductible, but the LMI itself is after 5 years? Over 5 years, not after - your accountant will sort it out for you.

Lets assume I've paid $11,000 of LMI to get an 88% LVR in my example.

Do you mean that If I hold the property as an IP for 5+ years, can I

• start claiming a tax deduction of the LMI amount after 5 years?
  If I paid $11,000 LMI, what could I claim after 5 years?
• on sale any time after 5 years, I could add the original LMI into the cost base?
  But I can't do that before 5 years? No, see above

Also, are there any benefits to paying the LMI in cash vs adding it to the loan?
The benefit of paying cash is that it reduces debt. The benefit of adding it to the loan is that the interest is a deductible expense and frees up your cash for either you next deposit, or to pay off your PPOR which currently has non-deductible debt.
Clearly adding it to the loan increases the actual LVR as far as pulling out equity later, and increases the interest payments (but not by much).
I assumed that one benefit to adding it to the loan means the interest is deductible (benefit) whereas paying in cash upfront means there's no interest to deduct.

Added to that, using your offset cash as a deposit is not an efficient way to buy your IP - you'd be better off paying the funds into your PPOR, and re-accessing via a split loan on your PPOR. This minimises non-deductible debt and gives you a 100%+ lend against your IP.

Total debt will be the same, just less against PPOR and more against IP.

 

[jpcashflow]

Hi

Hi,

I would rather borrow the fund for the LMI and Keep the cash in the offset account

 

[Redom]

If you have the funds to purchase at 80% and are doing a renovation, then I'd likely advise to go at an 80% lend at the outset.

This gives you more FLEXIBILITY to access equity in an efficient and cost effective way.

Once you've done a renovation, order 3-4 valuations on the property from suitable lenders.

I suspect you'll see a range in the valuations. If the range is substantial enough, move over to the bank with the higher valuation AND then top up at 85% LVR (more if you can).

If you pay LMI now and do a reval, you're stuck with that bank and that one valuation.

Balancing this may be potential changes in the lending market over the year ahead, but as of now, you should be ok to do the above.

Cheers,
Redom

 

[mcarthur]

If you have the funds to purchase at 80% and are doing a renovation, then I'd likely advise to go at an 80% lend at the outset.

This gives you more FLEXIBILITY to access equity in an efficient and cost effective way.

Once you've done a renovation, order 3-4 valuations on the property from suitable lenders.

I suspect you'll see a range in the valuations. If the range is substantial enough, move over to the bank with the higher valuation AND then top up at 85% LVR (more if you can).

If you pay LMI now and do a reval, you're stuck with that bank and that one valuation.

Balancing this may be potential changes in the lending market over the year ahead, but as of now, you should be ok to do the above.

Cheers,
Redom

Ah that makes sense Redom - thanks. I thought there was another reason I was missing, and that's the re-valuation from that lender is your only option.

 

[mcarthur]

Hi,

I would rather borrow the fund for the LMI and Keep the cash in the offset account

I'd love to borrow the funds for the deposit and LMI as the interest would be deductible (I assume!) rather than from my personal warchest where there's no interest to deduct.

But I don't understand how to borrow the deposit as I doubt the bank will give me a LOC on my 80% LVR PPOR that can't be valued (yet ).

I suppose I could take out a personal loan at some larger interest rate for the LMI though - about $5-10,000 - and pay off the LMI upfront. I assume that would mean that the interest I would pay on the LMI-personal-loan was deductible immediately yet the LVR was kept lower than simply adding the LMI to the loan.
Without getting out Excel and shoveling in the numbers, is there a basic "do that"/"not worth it" calculation result?

 

[almostthere]

If you have the funds to purchase at 80% and are doing a renovation, then I'd likely advise to go at an 80% lend at the outset.

This gives you more FLEXIBILITY to access equity in an efficient and cost effective way.

Once you've done a renovation, order 3-4 valuations on the property from suitable lenders.

I suspect you'll see a range in the valuations. If the range is substantial enough, move over to the bank with the higher valuation AND then top up at 85% LVR (more if you can).

If you pay LMI now and do a reval, you're stuck with that bank and that one valuation.

Balancing this may be potential changes in the lending market over the year ahead, but as of now, you should be ok to do the above.

Cheers,
Redom

Excellent advice

 

[mcarthur]

Added to that, using your offset cash as a deposit is not an efficient way to buy your IP - you'd be better off paying the funds into your PPOR, and re-accessing via a split loan on your PPOR. This minimises non-deductible debt and gives you a 100%+ lend against your IP.

Total debt will be the same, just less against PPOR and more against IP.

Doh! Of course -thanks Jess.
I was trying to see how I could make it 100% and now understand how.

So it would be:
1. pay the $125,000 off the PPOR loan (not just offset).
2. organise with bank for LOC/split for $125,000
3. do deposit for IP, possibly including LMI upfront, from the LOC/split.

Hopefully this helps others as well on the LMI decision...

...but...

...thinking...

...except, won't the bank want to re-value the PPOR to determine current LVR on PPOR before they do the split (to make sure I'm under my 80% for PPOR)?
It's been >6 months, <8 months since purchase.
I don't want a valuer knocking on the door right now .

 

[Jess Peletier]

So it would be:
1. pay the $125,000 off the PPOR loan (not just offset).
2. Get your broker to organise LOC/split for $125,000
3. do deposit for IP, possibly including LMI upfront, from the LOC/split.

Fixed it for you Generally I wouldn't recommend DIYing this, if it goes wrong it can be messy and complicated to fix.

B/C you're with CBA already, and under 80% they'll take an AVM (desktop) so no doorknockers.

 

[mcarthur]

Fixed it for you Generally I wouldn't recommend DIYing this, if it goes wrong it can be messy and complicated to fix.

B/C you're with CBA already, and under 80% they'll take an AVM (desktop) so no doorknockers.

- your version looks a lot better.

Very (!) glad to hear the desktop will be enough!