Mortgage Insurance

[Rolf Latham]

From: Rolf Latham


Hi Ian

I thought I would just but in here for a second, theres 7 "unrelated" posts about acronyms.

Lets start with that then.

LMI - Lenders Mortgage Insurance, important distinction because this is insurance you have when you do not have insurance. LMI protects the lender against a loss if they need to turf you out on the street and the fire sale raises less than what you owe.

Merits, well using LMI costs a few bob, but allows you to spend less of your own money to buy. This means you can buy more properties or have improved lifestyle while still purchasing a property.

Because you are using more of someone elses money you are increasing the return on your money.

Effectively some Lenders will actually give you a ~ 97 % loan on say a 295 k I/O loan, for a 2 % LMI premium.

Caveats with LMI

LMI deals are scrutinised more thoroughly both on serviceability and valuation (on refinances especially).For example where tax benefits from IP loans are allowed with some lenders where there is no LMI, Add LMI and those extra bits can no longer be used to calculate your serviceability.

There is a limit on the individual security property value where LMI is available. 500 k is usually a good guide.

If you are thinking of a 95 % I/O loan on a 400 000 k property, the rest of your dealings had better be airtight.

There is a cumulative total that any one Lenders Mortgage Insurer will carry for any one borrower. This is extremely variable, and starts at 500 k.

There is NO general answer. It depends on each borrowers needs, wants and capabilities.

Long post )

Lots more opinions I'm sure.

Ta

Rolf

 

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Reply: 1
From: D R


Hi Rolf,

I had this problem with LMI just recently.

I had two IPs with LMI, same lender. Total value of these loans was 390k.

Tried to finance another IP to 90%LVR which would of been a loan for 300k. Got rejected because there (LMI) total exposure was over the magic 600k (390 + 300 = 690) mark.

Absolute pain in the ass.

The other thing I found out is that they work out your servicabilty based on P&I payments irrespective of whether it is an IO loan. Makes a big, no, HUGE difference to cashflow calcs.

Time to change lenders. But who will lend me more money :O(

Cheers


DR

 

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Reply: 1.1
From: The Gow's


Hello everyone
this will be my first post and about our first I.P.

A question if i may? alot of you are talking about LMI with 90% and 95% of the loan, what are your thoughts on having a loan of say 106% to finance our first I.P.

Thanks in advance for all info
JLGow

 

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Reply: 1.1.1
From: Miakat .


John,

That is how we financed our first IP. If you can still buy a cash flow positive property with 100+% finance then you are doing well. If you plan to negative gear then just check how much you will be forking out every month to see whether 100+% is the way to go for you.

Miakat

 

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Reply: 1.1.1.1
From: The Gow's


Miakat,

Yes i have done some calculations and it looks like we will become cash flow + by about $44 per week, due to high income tax
and we will have to have LMI because we only own about 30% of our own home.

 

[WebBoard]

Reply: 1.1.1.1.1
From: Miakat .


John,

If it means the difference between buying an IP and not, then I would pay the mortgage insurance. It's only a few grand and if you are cash flow positive then that's great. Well worth doing.

Miakat.

 

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Reply: 2
From: Sergey Golovin


Rolf, I think only one book is missing on my bookshelf is yours.
If you can come up with book where you can explain in simple and basic terms how finance system works, how to borrow money and what are the restrictions imposed by be the finance institutions on individual and company investors you will hit the jackpot.
I will be first one in line to buy it.

Regards
Serge G.

Property Investing Discussion

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Re: First Time Investor

From: Serge G.
Date: 4/27/01
Time: 9:19:20 PM
Remote Name: 210.8.224.3

Comments

Well-said Brad. I've been looking to set up a company as an investment vehicle. But as you said unless you have some investment in that company (or any legal
entity for that matter) which produces positive cash flow (profit) you cannot offset it against anything. However it can be transferred to next financial year and offset
against future income (if any). And only option would be to offset it against your salary/wage. You have to keep working, at your current job (position). So,
company as structure becomes bit difficult to run at initial stage anyway, unless you have something in that company which produces income. Otherwise it is total loss
on weekly basis. Money is going out of your pocket. Also, according to Rolf Latham (one of the Sydney well known and respected financial brokers and advisers -
you will see some of his comments on www.somersoft.com.au) it is a bit difficult to get finance from lending institution to buy that property, specially the first one,
through the company structure. They do get bit unsettled. I wonder why…But is OK to borrow those money as private individual (I'll say it again - at initial stage!).
And second point - negative gearing would be around as long as government will allow it be. In US they abolished it 1985-6? (Check with Robert Kiyosaki book
"Guide to Investing"). Negative gearing is no longer applicable, that's it. Regardless what you want. It is no longer there. All you have to do now is to concentrate on
Positive Cash Flow. What it also means that, the Tenant has to come up with full rental weekly payment and cover all expenses. Now it is only up to you not to
make any mistakes and make sure that you actually do have positive cash flow out that investment. It makes life tougher but easier sort of speak. Now, in Australia
they (government) did try to do the same in 1985-6 as well, according to Jan Somers book "Building Wealth through Investment Property". But it did not stay
around for too long. As she said - two years only.? Population needs cheap (discounted) rental properties. They cannot afford anything else. That is simple is that.
Can they afford it now with introduction of GST, no one knows. This is why the Tax Department allows claiming all sorts of discounts (deductions). Not because
they do like you but simply to allow you to stay (afloat) on surface (just about) sort of speak. So you are not going to sink and pull all of them down with you. When
it is going to be changed? Who knows when? Looks like Liberal government is on way out, otherwise they would've done it. Well at least they did make an attempt
with some degree of success, as we all know. Would Labour or Democrats do the same? Hard to tell. To simplify the system and have some extra cash towards the
next budget - they would. But from social point of view (take money out family pocket), I do not know… Can you use Negative Gearing to buy and run an
investment property? Of course you can. What are you going to do if you have found property with positive cash flow which pays for all bills and also gives you
some in come? Grab it…

Regards Serge G.



Last changed: April 27, 2001

 

[Rolf Latham]

Reply: 1.1.1.1.2
From: Rolf Latham


Hi John

You may be able to get away without LMI depending on lender and structure. Mail me offline with personal details if you wish. LMI is not always required above 80 % (just most of the time !!)

Ta

Rolf

 

[Rolf Latham]

Reply: 2.1
From: Rolf Latham


Gee thanks Serge

One day maybe - in the meantime though there is too much real time help required out there

Ta


Rolf