To Lmi or not to lmi

[blackenator]

Hi Guys I am seeking some advice.

I am currently in the process of purchasing my first home buying the land then building to and going to live in it for 6 months to get the fhog. I do have the deposit for the house and land now but and I do have money left aside. My goal is to acquire as many properties as I can as I have no debt besides my hecs and live at home and pay no rent/board.

I would like to know what would be the better option to pay extra to lower the costs of lmi or to keep that extra money and save it for a down payment on for another property or put that extra money towards the initial deposit to save on lmi cost?

The house and land will costs me about 480k and house and land packages in the region I purchased are now starting from about 550k

Thanks in advance

 

[D.T.]

You said yourself - goals to acquire many.
Lmi is your new best friend

 

[Richard Feynman]

D.T. hit it.

Utilise LMI, it'll dramatically speed up your acquisition of assets.

 

[Terry_w]

Arguments for:

1. Stetches your deposit money further, potentially allowing more purchases quicker.

2. LMI is deductible if investment

3. LMI will be harder to qualify for as you get more properties

4. in 20 or 30 years time what you paid in LMI will be insignificant

Arguments against:

1. LMI costs a lot of money

2. Must pass a more stringent loan qualification, needing lender approval and LMI approval


Alternative strategies
1. Borrow 80% now and increase the loan later. This may allow a higher loan overall as some growth and improvements can allow for a higher valuation. Alternatively it can save LMI if the LVR is lower

2. 1 must have some tax issues so you could combine it with a friendly lender strategy. You borrow from a related party to pay for deposit and costs, ie 104% with 80% from bank and 24% from family etc. You later refinance the 24% into the bank loan and you still have your cash available for non investment purposes without affecting deductibility of interest. You need legal and credit advice before doing this.

 

[blackenator]

Thanks guys for your quick reply. I didn't really think about keeping that extra deposit aside for my next purchase until now. Would I be able to borrow again whilst in that 6 months period for obtaining my fhog?

My income is about 75k and the house will be my ppor for the first 6 months to get the fhog and stamp duty exemption and if I do have equity in the house will it be wise to pay lmi again if I go passed the 80% threshold? For my next purchases or will it be better to have a cash deposit?

 

[Terry_w]

Thanks guys for your quick reply. I didn't really think about keeping that extra deposit aside for my next purchase until now. Would I be able to borrow again whilst in that 6 months period for obtaining my fhog?

My income is about 75k and the house will be my ppor for the first 6 months to get the fhog and stamp duty exemption and if I do have equity in the house will it be wise to pay lmi again if I go passed the 80% threshold? For my next purchases or will it be better to have a cash deposit?

There are no restrictions on borrowing or buying another, if you can find a willing lender you can do it.

How you borrow will depend on the situation at the time. You do not want to use the first property as security for the second (cross collateralising) but you could borrow against the first to get the second.

Whatever you do you would want to maintain all of your cash for the eventual purchase of a main residence (one where you will live).

 

[Mick C]

LMI and lender choice is the key. So you need to really plan ahead not just in deposit but also serviceability...

No point paying $4-6k on LMI and realize you can't even get your next loan....

Based on the numbers given, you should be ok for a 2nd loan but it depend on the purchase price and rental yield your targeting?

 

[blackenator]

There are no restrictions on borrowing or buying another, if you can find a willing lender you can do it.

How you borrow will depend on the situation at the time. You do not want to use the first property as security for the second (cross collateralising) but you could borrow against the first to get the second.

Whatever you do you would want to maintain all of your cash for the eventual purchase of a main residence (one where you will live).

Ah thanks yes I have learnt not to cross secure the loans collateralise. I don't plan on buying my ppor for a few years yet so I would like to have all my excess money into further properties. I know the first few properties if chosen and financed correctly could really help obtain my goals a lot quicker if I minimise the mistakes so I am trying to find the best option.

 

[blackenator]

LMI and lender choice is the key. So you need to really plan ahead not just in deposit but also serviceability...

No point paying $4-6k on LMI and realize you can't even get your next loan....

Based on the numbers given, you should be ok for a 2nd loan but it depend on the purchase price and rental yield your targeting?

I am hoping to buy in the logan region in qld for a unit about 150k to 250k region. The rent returns should be anywhere from 200 to 300 a week. I really want to try to acquire as many properties as I can over the next few years and will be fuelling all my extra money to acquire as many properties as I can

 

[impala67]

..Utilise LMI, it'll dramatically speed up your acquisition of assets.

+1 - Everyone's pretty much said what I was going to say.

Take heed of all the broker's advice to make sure LMI is worth your while, which it seems it is. Know why you buy each & every property & invest first and PPOR later. All the best with your purchases.

 

[Rolf Latham]

I really want to try to acquire as many properties as I can over the next few years and will be fuelling all my extra money to acquire as many properties as I can

If thats truly your goal, then you would be well served to start with the end in mind.

Using the wrong lender too early in your investing career can apply the brakes and ultimately bring the vehicle to a dead stop for a long time..........

Chat with a broker who can plan with you, on paper where and how you can get to your goals.

this is one time where a single lender approach will mostly not work

ta
rolf

 

[Terry_w]

I don't plan on buying my ppor for a few years yet so I would like to have all my excess money into further properties.

Imagine you are able to stay at home while acquiring 10 properties with say $50,000 deposit in each.

You then go and buy a $500,000 PPOR. All your cash is tied up but you have plenty of equity so borrow. You are now paying $25,000 in interest which isn't deductible.

Properly structured you can have your cake and eat it too and have an extra $25k deduction each year.

 

[Colin Rice]

To add people sometimes get stuck on "I don't want to pay LMI" treadmill for a few different reasons.

If you break it down into weekly interest payments in many cases it is the cost of a coffee to flog a well used cliche.

I find most DIY finance people that have inefficient loan structures set up by a broker/bank only need a tweak here and there to recover the extra weekly interest payment from a cash flow perspective.

Like Terry said you will look back in 20-30 years or sometimes in months depending on the stage of a growth cycle and the extra initial cost will be insignificant.

 

[Peter_Tersteeg]

There's been some good advice all round here.

For an aggressive investor interest rate should be less of a priority than being able to fund the next purchase, but it is worth raising...

You will get better interest rates if you borrow 80% or less. A few lenders don't discriminate, but most do. For modest loan amounts the difference might only be 0.1%, but it can be as much as 0.3% or more when you approach $1M in lending.

Overall this is a secondary consideration for most people but it's worth bringing up.


The most important thing is to understand what your next step might be. As Mick mentioned, there's no point in paying LMI if you're reached the end of your borrow capacity. You can always top up to 90% with most lenders and pay the LMI later if things change.

 

[blackenator]

Imagine you are able to stay at home while acquiring 10 properties with say $50,000 deposit in each.

You then go and buy a $500,000 PPOR. All your cash is tied up but you have plenty of equity so borrow. You are now paying $25,000 in interest which isn't deductible.

Properly structured you can have your cake and eat it too and have an extra $25k deduction each year.

Thanks I see your point. Its just tricky for example the property I have purchased now I will end u paying 480 for it will probably be worth maybe 550? If withdraw equity from that and use it for another property I would pay lmi again is that the best way to do it?

 

[Terry_w]

Thanks I see your point. Its just tricky for example the property I have purchased now I will end u paying 480 for it will probably be worth maybe 550? If withdraw equity from that and use it for another property I would pay lmi again is that the best way to do it?

If you borrow mor than 80% you would pay LMI. If you have already paid it on hte original loan then you would generally only pay LMI on the increased portion.

Whether this is the way to go or not will depend on your thinking and your situation.

 

[blackenator]

Thanks all for your reply I am going with cba for the first loan I don't know if that's going to be a good choice or not? I may have to ask my broker on what my options or obtain a new one probably from this forum. Thanks a lot for your input guys I really appreciate it

 

[D.T.]

Dont choose lenders at random mate. Discuss your path with your broker based on your circumstances and goals.

 

[blackenator]

Dont choose lenders at random mate. Discuss your path with your broker based on your circumstances and goals.

I went through a broker to stated the loan was with cba. I didn't choose the lender the broker

 

[Rolf Latham]

Thanks all for your reply I am going with cba for the first loan I don't know if that's going to be a good choice or not? I may have to ask my broker on what my options or obtain a new one probably from this forum. Thanks a lot for your input guys I really appreciate it

Possibly a fortunate choice since they are in the lower one third of serviceability of most lenders and have a good general all round policy for lmi loans that add up to less than a million.


Ta



Rolf