LMI - what would you do in this scenario

[allsuccess]

Hi all,
I have a property valued at 400K. Owe 280K. Planning to draw equity out.

1. 80% LVR = 40K
2. 85% LVR = 56K (roughly about 4K LMI)
3. 90% LVR = 73K (roughly about 7K LMI)

NOTE : LMI will be added to the loan.

What option would you choose if it's taking equity out for the next purchase? Plan is to at least hold it for 5+ years. I'm leaning towards option 3.

New purchase 400K.
Buying costs 20K

Loan 80% LVR 360K. So, balance 60K will be funded via equity.

I do have savings but don't want to use as it's my buffer.

 

[Aaron_C]

Why not go 85% for both loans and reduce your LMI cost?

 

[allsuccess]

Why not go 85% for both loans and reduce your LMI cost?

Ops, made a big mistake;

new purchase, 400K @ 80% LVR is 320K (not 360K).

So, yep, 85% on both looks good (Thanks Aaron).

2. 85% LVR = 56K (roughly about 4K LMI)

new purchase
400K @ 85% = 340K

Shortfall = 80K. Which means I may have to use some of my savings.

 

[Brady]

All depends on your risk appetite, how aggressive do you want to be?

You mentioned the plan is to hold for 5+ years but are you wanting to purchase again asap? I usually find a large number of my clients who intentionally purchase an investment property will look to purchase again.

Also note that you have said $360k is 80% I assume thats just a typo as $360k is 90%.

Have you paid LMI on the existing funds? This is very important as you will get credits for LMI already paid.

Assuming that you haven't paid LMI already. I would look at 87% for the equity loan as LMI is roughly 1/2 the price of 90%. And would look to go at 90% for the IP.

 

[devank]

Why the 2 x 85%LVR is better than 1 x 90% LVR?

In this example, We have a loan amount of 400K.
@ 80% LVR, your loan is 320K. You get zero extra money (make this as the base case scnerio)
@ 85% LVR, your loan is 340K but you have 4K LMI => So your extra money is = 340-320-4 = 16K
@ 90% LVR, your loan is 340K but you have 7K LMI => So your extra money is = 360-320-7 = 33K

33K > 16K x 2
=> 90% LVR on one property is better than 85% LVR on two properties

You also get the advantage of not being tied to that bank.

 

[allsuccess]

Thanks Brady. Yep, the LVR 80% was a mistake.

No LMI on current properties.

 

[allsuccess]

Why the 2 x 85%LVR is better than 1 x 90% LVR?

In this example, We have a loan amount of 400K.
@ 80% LVR, your loan is 320K. You get zero extra money (make this as the base case scnerio)
@ 85% LVR, your loan is 340K but you have 4K LMI => So your extra money is = 340-320-4 = 16K
@ 90% LVR, your loan is 340K but you have 7K LMI => So your extra money is = 360-320-7 = 33K

33K > 16K x 2
=> 90% LVR on one property is better than 85% LVR on two properties

You also get the advantage of not being tied to that bank.

Sorry, I'm missing the point here Devank. What is 320 that you have used?

Scenario 1
existing property 400K valued. 280K owing on it.
So, you are saying, keep that 80% => Gives me 40K.

new purchase 420K (400k + 20K purchasing costs).
90% LVR = 353K (minus 7K LMI).
Short fall => (420-353) = 67K
So, out of pocket = 27K

Scenario 2,
both 85% LVR
Equity 56K

new purchase 420K (400k + 20K purchasing costs).
85% LVR = 336K (340 minus 4K LMI).
Short fall => (420-336) = 84K
So, out of pocket = 28K

So, 1K difference (in favor of scenario 1)

 

[allsuccess]

Why the 2 x 85%LVR is better than 1 x 90% LVR?

In this example, We have a loan amount of 400K.
@ 80% LVR, your loan is 320K. You get zero extra money (make this as the base case scnerio)
@ 85% LVR, your loan is 340K but you have 4K LMI => So your extra money is = 340-320-4 = 16K
@ 90% LVR, your loan is 340K but you have 7K LMI => So your extra money is = 360-320-7 = 33K

33K > 16K x 2
=> 90% LVR on one property is better than 85% LVR on two properties

You also get the advantage of not being tied to that bank.

I see your point. Thanks Devank.

 

[Aaron_C]

Oh I see. You'd have to work out each alternative but going for max LVR on one property at 88% LVR + LMI is a good way to reduce the cost. 85% isn't bad too as you can go with a lender like Citi and have the LMI waived.

 

[allsuccess]

Oh I see. You'd have to work out each alternative but going for max LVR on one property at 88% LVR + LMI is a good way to reduce the cost. 85% isn't bad too as you can go with a lender like Citi and have the LMI waived.

Citibank still does this? Had a quick look at their website but can't really find anything.

 

[Aaron_C]

Citibank still does this? Had a quick look at their website but can't really find anything.

Yes they do. Speak to your broker about it.