Mortgage Insurance / Loan Structure etc.

[Leikela]

Reading through different forums have brought up a few questions for myself. I have a PPOR, loan value is 60% and an investment property just purchased which is borrowed at 100%. I used my PPOR as security for the investment to keep my borrowings under 80% to avoid mortgage insurance. Going through the posts I've read that this sounds like this may not be recommended, but is this only if I want to sell my PPOR, because it's security for the investment property? I have only just moved into it so have no intention of selling any time soon so if that's the only problem then that's ok.

I'm wanting to purchase a second investment property, not sure how long down the track though. But after my readings, it's sounding like it might be best to buy it stand alone and just pay the mortgage insurance? If this is the case, and for whatever reason it all turns to crap, does this mean the bank can't touch invesment property 1 or my PPOR? So from a security purpose does mortgage insurance make it safer, plus give me more flexibility when it comes to selling properties if they are all stand alone and not have security relying on other properties?

 

[Rolf Latham]

Hiya

We dont know all the soft data ariund this question, so specific advice wont be really available.

In general I woiuld bust up the xcoll you have now, and make the properties stand alone. If nil LMI was payable then, its unlikley that youd need to oay any now with the "right" structure.

Your broker/banker should be able to help you, but dont be surprised if you get vacant looks......................after all, maybe they should have though about asking anout YOUR goals for the future before structuring the deal as it is.

On the other hand, there may be valid reasons for the xcol, but that would be quite rare.

ta
rolf

 

[Leikela]

I think I need to sit down and speak to someone who knows what they're talking about. I started to suspect this person who set it up had no clue what she was doing. I thought I had to have this x-collateral thing in place to avoid the LMI, even though overall it was still under 80%. I'll speak to the bank about splitting this up. Thanks.

So forgetting that setup, if a new property is purchased with the loan secured only against the new property, and LMI is paid. Does this give protection in case for whatever reason something goes wrong? I'm pretty new to this property investing and I'm a really cautious person. I won't go ahead with IP 2 until I have a decent cash buffer, but would be comforting to know that LMI isn't a complete waste of money also and offers protection to my PPOR if the IP 2 fell apart (can't see why it would, but just being overly cautious).

Thanks for the help - wish I discovered this forum months ago.

 

[Rolf Latham]

Hiya

LMId loan may help a little to spread risk if its with another lender.

But I see some structural issues here that arent related to LMI.

Any post tax cash buffer that you save should go back into or against the PPOR loan, and not be used to buy the IP............everytime you have sufficent cash buffer you could ( should ?) restructure your loan limits so that the cash saved money goes back into the home loan, and a new IP deposit loan comes out of the now newly created PPOR equity.

Sounds like you might want to sit with a good independent broker that has doine debt recycle work.

There are other strategies that you may be able to employ to get rid of your tax dedcutible debt more quickly

ta
rolf

 

[Qlds007]

Mortgage insurance only covers the lender and not you in the event of a default.

If the property is sold under the lenders power of possession and there are insufficient funds to cover the loan and accrued costs the lender will look to recoup the shortfall from the mortgage insurer.

The mortage insurer will then look to persue you further to recover its outstanding amount.

Hate to say if you are really cautious you certainly would have not set the loan up as you have done with the PPOR and the first IP cross collateralised.

 

[Token Funder]

If the worst happens, the bank forecloses on a property and has a shortfall, you will owe the shortfall. The bank then has the standard rights of any debtor, so to a certain extent your other assets are at some risk if you can't meet the debt from other reserves and want to avoid bankruptcy.

 

[Leikela]

Thanks Rolf, every spare cent I have does go into an offset account against my PPOR to ensure that I am claiming the maximum interest I can. I guess what I'm asking is, how do I borrow 100% for IP without paying LMI if the equity is in my home but I don't want to x-coll. Does anyone recommend a mortgage broker in the Bayside area of Melbourne then so I can get this all setup properly? It's not desperate as I'm financially secure with what I currently have and have no intention of selling either any time soon, but later down the track I should get it shorted especially when it comes to buying IP2.
Thanks for all your help.

 

[Peter_Tersteeg]

The benefit of LMI for the borrower, is it allows you to use less of your own money to purchase a property. By using LMI you might be able to purchase two properties instead of just one, with a similar sized deposit.

To avoid X-col, rather than offer your house as security for a 100% loan, you get a line of credit type loan (secured against your house) to draw down the equity as cash. You then use this cash as a 20% deposit for the IP and get an 80% loan against the IP.

The result is the same, but it avoids x-col and you can even take the IP to a completely different lender if you want. At this point you'd need to do some restructuring of your existing IP before you purchase another property.

You definitely don't want to use x-col and LMI in the same structure because you'll pay LMI against the entire loan structure, not just the individual IPs. You'd probably pay 3 time more LMI than you would ever need to.

 

[Qlds007]

Pete's in Melbourne and whilst i dont know if he is in the Bayside area a quick phone call and I am sure he can set you on the right road.

Cant be too many Professionals you can talk to for nothing and get them to do all of the work and still be charged zippo at the end.

 

[Leikela]

The more I think about this, the more confused I get. If LMI offers no protection to the borrower then why is x-collateralisation so bad? If the bank can ultimately go after anything you own, then nothing is really protected anyhow...

I'm extremely confident of my financial situation at present so it's all just hypothetical, but would be nice to know because I don't know how soon I should buy IP2 as I don't like too much risk.

 

[turk]

Leikela

I live bayside and use PT Bear, give him a ring as he's an excellent broker
and will be able to answer your questions.

Cheers

Pete

 

[Peter_Tersteeg]

I'm of the general opinion that if cross-collateralisation can be avoided it should. There are a few arguments for it, but I'd say they don't apply to 95% of the population.

I've attached a summary of why it should be avoided - it's not just to hedge against you defaulting on the loan.

If you add LMI to the equation, it just adds more problems.

 

[Leikela]

Thanks PT Bear for that information, very helpful. Fortunately I don't see an immediate issue with what I have as my finances are secure and I've bought both properties fairly recently so don't see myself selling either of them even within the next 10 years so the lack of flexibility isn't an issue either. I will however look at 'fixing' it up at some stage in the near future. IP 2 will definately be stand alone and with another lender however, and I will probably come pay you a visit when I'm ready to sort all of this out. Your assistance is much appreciated.

 

[josko]

I'm of the general opinion that if cross-collateralisation can be avoided it should. There are a few arguments for it, but I'd say they don't apply to 95% of the population.

I've attached a summary of why it should be avoided - it's not just to hedge against you defaulting on the loan.

If you add LMI to the equation, it just adds more problems.

Good for you PT, that is a "handy" handout you have there.

Hi Leikela,

For what it's worth, I'm also not a big fan of X-Collateralisation.

Regards JO