To those who borrow using LMI

B

bradje

Hi,
A question for those who borrow 100% or as close as they can for IP's.....Could u pls tell me why and why u r prepared to pay the LMI?
(My aim is to grow with Residential property as quick as I can, but I am still hesitant in paying the LMI. I also figure that if I can buy say 15-20 years of a time buffer on my loans (eg via LOC) then the strategy is very safe, at least for one lifetime :) ).
Thx 4 your help,
JB
 
Say you start with borrowing 80%, thinking you then have a buffer of 20%. Why would one prefer to borrow say 95% and pay a chunk of LMI? In THIS current environment, there are growing risks that you can't access that 20% buffer when you want to. On the other hand, borrowing 95% LVR and putting the extra 15% that you would have used as a deposit into shares or just an offset account increases the chance that you can access that money.
Alex
 
I have chosen to pay LMI in the past, to help me to buy a property or two I would not have otherwise have not been able to buy.

One was our PPOR- which we had built. On completion, in a flat house price environment, the valuation was less than the land plus build price- so we were up for LMI.

Because LMI was then "stepped" (one rate for 88-90%, a higher rate for 90-92%) I was able to reduce the LMI substantially by taking a credit card cash advance. (I don't remember the figures. But it was something like borrowing $3K on my credit card brought down the LVR from 90.1% to 89.9%- and this reduced the LMI premium by $2K. So the interest I paid on my credit card was well worth it.

That was a time of very low growth. It was not a time when financially it made sense to pay LMI. But we did not have a choice then.

But it did turn out to be a very good choice. In fact, I regrret not having used up LMI to the max to buy units in the same town- 'they were very much CF+ back then, but I thought that they would not have very strong growth.

WRONG!
 
Think of the LMI as the cost of doing business with the benefits of greater exposure to assets plus more cash left over as a buffer (however also consider the risks!).

Assume you have $100k and want to invest in property.

Example 1.
$300k property
$60k deposit (20%)
$17k buying costs
$77k total

$23k cash buffer
$300k exposure to property
----------------------------------
Example 2.
$300k property number 1
$15k deposit (5%)
$20k buying costs (Inc LMI)
$35k total

$300k property number 2
$15k deposit (5%)
$20k buying costs (Inc LMI)
$35k total

$30k cash buffer left over after 2x properties
$600k exposure to property

----------------------------------

Alex also has a good point, think of the LMI as paying insurance to enable access to the extra 15% money for times when credit becomes tight, even if it just sits in an offset account!
 
JB
Its a variety of reasons.

In a lot of cases it lets borrowers do things they cant do otherwise or dont have the patience to.
and...
some dont want to pay lmi due to costs while some dont have a choice
and...
some want to pay it to have more access to their cash reserves in case something goes pear shaped
and...
some like the thought of the insurer/lender carrying the risk a bit more
and...
a ton more- well maybe not a ton...
 
Take my son as an example. Can't save a cent but good at paying commitments.

Moved to Melbourne for a great job opportunity. Rented with partner for 6 months. Incredible income, no savings.

Bought first home in 2004 for $275K. Borrowed 100% and paid LMI.

In 2006 had paid PPOR down to 90% LVR after re-valuation. Found his "perfect house" (he is a kayaker - walk out back gate, 100m through park to river). Turned first home into IP. Paid $360K for present PPOR, borrowed 100% paid LMI

Today? IP bank valued at $390K, PPOR bank valued $430K.

So in 4 years he has gained at least $185K in equity as valued by the bank. Local RE agents say much more, and both properties are expected to benefit from Eastlink.

So LMI ($20K max) has made him $185K over 4 years.

He is in the process of building another IP, but this time does not have to pay LMI because of equity.

He freely admits that if he had not bought his first home he would probably still be renting with no money.

So that is why some people are prepared to pay LMI.
Marg
 
Hiya Land

It would stand to reason that IF LMI providers have an increased claim rates, and a lower volume of new business that they will want to retain some of their margins by increasing premium rates.

To some extent, the lower volume of new business to LMI providers is self inflicted, there comes a point where an insurer has to take some form of risk so they can collect a premium.

Some of the dumb excuses I have been hearing of late from insurers take me back to the good old days of

We dont lend to single women in their 20s ( well its not voiced that way, but thats what it means)

Sorry sir you are rent reliant to someone with 10 + ips

ta
rolf
 
bradje said:
Hi,
A question for those who borrow 100% or as close as they can for IP's.....Could u pls tell me why and why u r prepared to pay the LMI?
(My aim is to grow with Residential property as quick as I can, but I am still hesitant in paying the LMI. I also figure that if I can buy say 15-20 years of a time buffer on my loans (eg via LOC) then the strategy is very safe, at least for one lifetime :) ).
Thx 4 your help,
JB
Click to expand...

What is that strange tongue you type in JB ?

You are'nt paying by the letter here, you can use as many of them as you like.:p

Not all of us understand , or want to understand, the strange language of robot.

Dave
 
So if I understand the concensus, then to grow the no. of IP's quickly, then obviously the more u borrow from the Banks the better. Also that LMI actually allows you to keep your savings separate for the rainy days that may come.

Thx
BTW...Thx Rolf for those links. Makes a lot of sense to me.
 
I'm no expert on the topic but, I know that I had to pay LMI to apply for a loan this week. Otherwise the loan's limit won't allow me to try and purchase another property. The LMI is about $3500 but I was happy to pay it in order to be able to buy this property now.
 
bradje said:
So if I understand the concensus, then to grow the no. of IP's quickly, then obviously the more u borrow from the Banks the better. Also that LMI actually allows you to keep your savings separate for the rainy days that may come.
Click to expand...

Quite simply, LMI allows you to borrow more. However, if you don't have other savings and are using LMI purely to push your LVR up so you can buy more, it can also come back to bite you. e.g. if rates go up and you're overleveraged with little equity and savings, it's easier to get killed.

Like anything else that allows you to borrow more money (and any very sharp instrument), LMI requires discipline and planning.
Alex
 
bradje said:
Hi,
A question for those who borrow 100% or as close as they can for IP's.....Could u pls tell me why and why u r prepared to pay the LMI?
Click to expand...

As others have mentioned, it gets you into more property sooner. It's just another cost of doing business.

If the difference between getting the next property was having or not having LMI, why would someone forgo another ? $300k IP increasing in value just because they don't want to pay the $2k LMI?

And to all those of you who are only paying LMI once you go over 80% - spare a thought for us poor b@stards on low docs! :D
 
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