Worth hitting up LMI to expand portfolio?

[Singo]

In this example, on top of $2650 LMI, you will need to pay about $1000 extra stamp duty as well. Suddenly the 21K extra fund is reduced to about 17K.
Unless you have good cash flow coming in, I would stick to 80% (or less) LVR. Having said that, risk profile for each person is different.

Yep, the issue here is not cashflow. We needed that 21k and that LMI was added to the loan. (I reckon there is no stamp duty on the mortgage in WA) So we paid 2.65k for 23.65k funds. Had we taken a personal loan at 16%, we will pay 10% more than mortgage rate and the LMI amount will be paid to bank as interest in 14 months.

I am not suggesting to everyone go for LMI. It works well at times, so we shouldn't just shut down that path. In the example above, we made instant equity of at least 25k. So the LMI we paid has paid for it straight away!

 

[D.T.]

Lmi is best thing since sliced bread

 

[Colin Rice]

Lot to be said to using a broker over DIY or a banker here, because you may need the LMI provider diversification long before you or your banker may be aware.

Good point Rolf.

Some lenders use both so can pick and choose as you go if required.

 

[Srasulov]

Lmi

I look at LMI as cost of doing business and if you serious about building an investment portfolio, sooner or later you will have to pay for it. Obviously, you want to avoid it as much as you can as you would any expenditure, but if you are confident (you have done all of your research to ensure there is more than industry in the area, infrastructure, population growth etc) that your new property will bring in good profits, then paying few thousand dollars to get more back makes sense to me.

For example, if you are buying a property worth 400K and within a year, it grew by 6%, then you made yourself $24K. Considering you put down 10% deposit, your LMI will be around 7K, so it makes sense. And as the others said, it is tax deductible. To make this example simple, I have not mentioned interest and other expenses that you have to pay, not rental and tax benefits that you get etc.
So, it all depends, if you have found a "good" property, then it makes sense, because you will probably make at least 2 percent, which is an average LMI amount, off the loan value.

 

[Peter_Tersteeg]

Brokers would love the 90% LVR. They get more commission


In this example, on top of $2650 LMI, you will need to pay about $1000 extra stamp duty as well. Suddenly the 21K extra fund is reduced to about 17K.
Unless you have good cash flow coming in, I would stick to 80% (or less) LVR. Having said that, risk profile for each person is different.

The stamp duty paid on a property purchase has no relation to the amount you borrow. It's based on the purchase price or value of the property. The stamp duty is the same if you borrow 90% of the property value or if you pay cash for it and don't borrow at all.


For what it's worth, the average extra commission earned by borrowing $21,000 extra is $126 (using upfront commission of 0.6%). Hardly worth compromising the advice for.

 

[devank]

The stamp duty paid on a property purchase has no relation to the amount you borrow. It's based on the purchase price or value of the property. The stamp duty is the same if you borrow 90% of the property value or if you pay cash for it and don't borrow at all.

LMI lets you buy a higher priced property - hence more stamp duty.

For what it's worth, the average extra commission earned by borrowing $21,000 extra is $126 (using upfront commission of 0.6%). Hardly worth compromising the advice for.

We are tied to the same lender once we pay the LMI. Hence more commission.

Don't get me wrong... LMI has its place. I used LMI for my last two IPs

 

[TMNT]

A few questions

If you make all your repayments can The bank call in your loan at anytime? What happens if property values drop by 30% But you still make the paymebts? Does it matter lmi or not?

If you buy an IP with 80% lvr and a year later the value has gone up slightly can you apply for a 95% loan with lmi??

I've been told if you have enough deposits for say 5 ips and you intend to buy say 10

I've been recommended in the past when I first started off
To still go at 80% as by the tiMe you get to ip5 there is a high chance you have some equity therefore no need to go inro lmi territory

Is this correct?

 

[Peter_Tersteeg]

* Strictly speaking, the banks can make some moves to recover funds from certain loans if the property value drops. Practically I've never seen it happen as long as the repayments continue to be made.

* The answer is yes, but it's very difficult to get a 95% loan in a refinance or top up scenario. 90% would be more realistic. In the scenario you've described, you'll pay LMI on the entire loan amount because you haven't paid it previously.

* I guess it depends on how quickly you buy the first 5 and then the second 5 relative to how quickly the properties increase in value. If you buy the first 5 over 10 years you probably won't need LMI. If you buy the first 5 over 12 months, I suspect you will need LMI. If you're going to aggressively build a portfolio, I'd suggest using LMI early. It all really depends on just how much cash you've got and how quickly you intend to use it.

 

[TMNT]

* The answer is yes, but it's very difficult to get a 95% loan in a refinance or top up scenario. 90% would be more realistic. In the scenario you've described, you'll pay LMI on the entire loan amount because you haven't paid it previously.


Ahh very good thanks

So refinance is genreally hard at anything above 80% or does it matter on your original lvr?

And I assume that lmi Is offset on the origina. Purchase

Ie 85% lvr at start and 85% after 5 yrs for example
You'd essentially pay no additional lmi except fo. The differnice in updated valuation
Is this correct

 

[Peter_Tersteeg]

So refinance is genreally hard at anything above 80% or does it matter on your original lvr?

Most lenders won't go above 90% on a refinance, even though they'd do 95% for the purchase. There are exceptions, but not many and even then the circumstances are fairly narrow.

In most cases, above 80% for a refinance, the lenders will want a very clear understanding of what the money will be used for. 80% or below they're more flexible. The specific policy changes from one lender to another and there may be additional mitigating or hindering factors.

 

[devank]

Most lenders won't go above 90% on a refinance, even though they'd do 95% for the purchase. There are exceptions, but not many and even then the circumstances are fairly narrow.

What is the reason for it?

Say you are refinancing one loan and also getting a new one. Would they easily go 90% as a whole package?

 

[Peter_Tersteeg]

What is the reason for it?

Most lenders don't like to go to 95% for refinances because it's inherently risky for them. The LVR is based on a valuation not an actual sale, so the valuation is still just an estimate.

Say you are refinancing one loan and also getting a new one. Would they easily go 90% as a whole package?

Yes but this is the exact scenario I was referring to.

The challenge here is that you'll probably refinance to get cash out for the purchase. Many lenders will want a detailed understanding of what the cash will be used for. They often want to see a contract for the purchase before they complete the refinance which defeats the purpose (chicken/egg problem). Easy at 80%, not quite so simple at 90%.

 

[Aaron_C]

What is the reason for it?

Say you are refinancing one loan and also getting a new one. Would they easily go 90% as a whole package?

The issue is the cash out policy. Most lenders have restrictions once LMI is involved. Many like Macquarie and AMP have little restriction but the big 4 except Westpac does. A straight 90% refinance with no cash out is easy but then what's the point?