Lmi

[rstephenp]

Good Day,

Just to give context to my LMI questions, below is a scenario

I want to borrow 300k towards my second property. If I borrow 90%, I will have to pay a LMI. (90% + LMI). I got a LMI quote of $3600 for 90% borrowing from my banker (IP)
a) Is the interest paid towards the LMI tax deductable
b) Is LMI included as a purchase cost and hence will be included in the CGT calculation whilst selling the property
c) If I renovate my property in 6 months and increase the value of the property. Which results in the LVR reduced to 80% from 90%
a) Do lenders return a reduced LMI back. If yes, which lender you have heard from does it
d) I dont want to cross collateralise my properties

Scenario 2
I borrow $240k to purchase 300K property LVR = 80%. The other 72k (20% + other expenses) I use from my offset account linked to my PPOR.
If I renovate my IP and increase the value of the property by 90k. This would reduce my LVR. However, I want to borrow more money to get it back to 80% LVR for future investment or reduce my PPOR. I can borrow an additional 72k (80% ok 90k). The additional funds I will put it in my offset account linked to my PPOR.

PS: My PPOR is with a big bank with introductory rates (huge break cost). whereas my IP is with a building society

1) Is the interest I pay towards 72k tax deductible.
2) Do I leave the additional $72k in the offset account of IP 1 and use the funds towards purchasing IP 2

regards
steve

 

[Wunderbar]

See: http://www.ato.gov.au/print.asp?doc=/content/00113245.htm

Scenario 1
a) Yes
b) It is a deduction, not added to the cost base
c i) Yes that is possible but that's quite an aggressive target. To decrease your LMI you have to basically add 30k of value to the property and basically put no cash in. That's unlikely to happen and if you had that spare cash why wouldn't you have put it into your loan in the first place to reduce LMI?
cii) Some lenders do refund LMI but you should ask a broker which particular lender does refund it.
d) You don't have to cross collateralise if you have 30k cash+stamp duty. Do you have that amount?

Scenario 2
1) No it won't be deductible because the purpose of the loan (which is the test) is for private purposes. If you used that 72k to buy shares or another property, then it will be deductible.
2) That would be preferable because you have easy access to the 72k that you can draw out at any time

 

[tobe]

a)is the property income producing, an IP? then yes
b)yes
c)if, then yes
a)some do, only if you sell or refinance the property to another lender, not just cause you did a reno
b) excellent
1) only if you use the money to produce taxable income, so when your 'future investment' turns into real investment, thats when you can start claiming.
2) leavign the funds in your PPOR would be slightly better financially, however many people might like to keep their records between PPOR and IP completely seperate.


Remember, its the purpose of the funds that determine whether you can claim the interest, and other expenses for an income producing investment, not where you borrow, or whether you pay LMI etc.

 

[Peter_Tersteeg]

Scenario 1:

If you're purchasing an investment property, the LMI associated with the finance for that purchase will be tax deductable. It can be treated as a purchase cost thus offseting CGT when you sell, but it's usually written off over a period of time like most capital costs.

If you renovate, increase the value of the property and thus reduce the LVR to below 80%, you're unlikely to get the LMI refunded, although a few years ago it was different.

Scenario 2:

If you redraw from your offset account, you haven't actually borrowed the funds, you've just taken the money out of a savings account. Despite the fact that your interest costs increase, you're not acutally borrowing more money so there's no deductions associated with doing this.

You'd be better off to use a second loan against your equity to fund the investment deposit & costs. You should use this loan for investment purposes only, thus ensuring it's fully tax deductable. You may need to pay down your PPOR loan with money from the offset account to 'create' the equity to do this.

When you top-up to increase your IP borrowings to 80% after the value has increased, don't take the money and put it into the PPOR offset. You'd be using investment funds to reduce non-deductable debt which the ATO doesn't like. Leave the money in the redraw facility for the IP or use it to pay down the second deductable loan against the PPOR. Either way you can later redraw these funds for the next investment.

Don't mix deductable and non deductable debt!

 

[dan c]

LMI is a cost of borrowing, and as such is deductible over five full years, or the term of the loan, whichever is shorter.

 

[rstephenp]

Keeping my above scenario of buying $300k

Option 1
I use the funds from my PPOR offset and not pay LMI. But his will reduce the funds I have to buy more properties.

option2)
I am on a 38.5% tax bracket. In the above example, the LMI being $3600, I can claim $1386 (multiply by 38.5%) back from tax. Furthermore, the interest on $27,000 (difference between 80% and 90% LVR) @ 7.2% is $1890 (multiply by 38.5%). In three years I can claim the entire LMI cost back.

Which option you recommend.

If I go with option 1, I can purchase a IP2 worth 150k to 200k. If I use option 2, I can purchase IP2 around 300k

Regards
Steve

 

[Wunderbar]

I would honestly try to avoid going for LMI if possible. It adds another layer of bureaucracy to the loan process and they're a real pain in the a$$ to deal with. I don't think you want the heartache.

 

[rstephenp]

Thnx guys,

Wunderbar u sold it to me. No LMI if I can avoid it

 

[Spectre]

would an 85% no lmi with westpac possibly fit as well?

 

[Mick C]

rstephenp - LMI is not always the end of the world! it's how you use this LMI....
For me as a investor, if i have to pay $3,000 LMI ( interest on it is tax deductible ) to free up $10,000-$13,000 cash that is fine...as i can use this to fund my next IP or next investment...But if i can avoid LMI by toping up my another loan (split loan if its a PPOR) then i would.

True; LMI has no direct advantage to the borrower in terms of protection- but if you look at your overall picure in regards to your trading/investment strategy it might work to your overall advantage.


Lastly Spectre, as mentioned correctly there are provider that offer NO LMI at 85% such as Citibank and Westpac. Also Adelaide bank offer NO LMI at 90% LVR - but the LMI must be under $4,300.

There's also a range of "Reduced" LMI provider out there.


Regards
Michael

 

[neil100]

Lastly Spectre, as mentioned correctly there are provider that offer NO LMI at 85% such as Citibank and Westpac. Also Adelaide bank offer NO LMI at 90% LVR - but the LMI must be under $4,300.

There's also a range of "Reduced" LMI provider out there.


Regards
Michael

Hi Mike,

Other than Westpac and Citibank, are there any other providers offering NO LMI at > 80%?

Also, which providers offer a sliding scale / reduced LMI ?

Many thanks
Neil

 

[Mick C]

A lot of these reduced or NO LMI lenders have strict criteria that must be met before they would offer this product, there's even a POSTCODE restriction! ie would not accept postcode 2000-2011, 3000-3005, 5000-5002 etc...

It be unproductive and irresponsible of me to list all the reduced or NO LMI providers as a lot of them wont be suitable to particular people/ situations; best to speak to a broker who can give you a detail list for your circumstances.


Sorry Neil100 - hope you understand where im coming from.


Regards
Michael

 

[neil100]

Sorry Neil100 - hope you understand where im coming from.


Regards
Michael

Absolutely, Thanks Michael.

 

[Rolf Latham]

there's even a POSTCODE restriction!
Sorry Neil100 - hope you understand where im coming from.

yeah but thats the same even with most LMI poviders.

try getting a decent LVR in a x000 pc an see how you go

ta
rolf