Your Opinion on no cash+no lmi or cash buffer and a tad of LMI

[r3ckless]

Guys,

Looking for some input from you for my next property purchase.

Option 1:

Borrow 80%, no LMI applicable but only buffer of around $2-3k

Option 2:

Borrow 85%, LMI charge of around $5k leaves around $17k cash buffer

Option 3:

Borrow 90%, LMI charge of around $10k, leaves cash buffer of $17k as per option 2, but also leaves around $28k in my investment loan which I can purchase goods to furnish the place, rent out place fully furnished and have the furniture tax deductible and can claim depreciation over time


Thoughts?

- I understand that the LMI component of the loan is deductible over 5 years, and at which point I will pay off that "non-deductible" portion

- I am planning to furnish the place over time, unsure if I should do it all right away or not. Would only do so if the tax benefits are worth it

Opinions?

 

[Rolf Latham]

transfer risk to an LMI provider and retain buffer.


typically 88 % +cap, but does depend on a few things

ta

rolf

 

[Jamie M]

Agree with Rolf - I'd rather have more than $2k in the bank and borrow more.

Cheers

Jamie

 

[Greg Reid]

You ask a few things here.
I agree with Rolf and Jamie, always better to have a cash buffer. The LVR that you go to will determine the LMI cost. LMI comes in bands, a progressive tax if you like, so get a broker to work out what level you can go to which makes $ sense. It is usually just under 86% or 88% and also in consider in conjunction with your borrowing capacity.

Once you go to LMI territory, depending on the lender and their DUA (if any) that second level of scrutiny & policy and often servicing calculators needs to be factored in as well.

For an investor, LMI cost is deductible over 5 years. It is added onto the loan from day one and as a part of the loan, you would not normally be looking to pay this IP loan down, leave it as IO for as long as you need it to be.

As to furnishing, if there is a benefit to do so and a tenant demand where you will get better rent yields and greater demand, then it is worth doing from day 1. You need to know the market in the area. You would not simply furnish because of tax benefits, you do it because it makes financial sense and gives you a better outcome than not furnishing.

 

[Bantam Roosta]

transfer risk to an LMI provider and retain buffer.

typically 88 % +cap, but does depend on a few things

I have just done this with my most recent purchase. When I was initially working out figures I was leaning towards 80% to avoid LMI, but after having the effects explained and crunching a few numbers I realised that keeping a larger buffer is a much smarter option (for me). It kept about $25k extra in my buffer and maximised the loan for deductibility purposes.

BR

 

[Richard Feynman]

Just reiterating what's been said above.

 

[r3ckless]

Thankyou all. I decided to go in the median. 85%.

 

[Bantam Roosta]

Don't just pick a random figure. Talk to your/a broker and get them to give you the 'best' figure. For not much more LMI, you may be able to to increase your LVR a few %, minimising your cash input.

BR

 

[travelbug]

If interest rates go up 1% can you cover the extra? If a hot water system blows do you have the cash?

Don't put yourself in the position where you need to sell to meet your bills. I've seen people lose their entire portfolio this way.

 

[rizzle]

What about for a PPOR? I'll soon be in a position where I need to decide how to distribute my cash savings. Do I essentially max out and put as much as I can down (18%ish), leaving a small buffer, or do I for example put 15% down leaving a larger buffer but more LMI costs?

 

[ZachAnSel]

What about for a PPOR? I'll soon be in a position where I need to decide how to distribute my cash savings. Do I essentially max out and put as much as I can down (18%ish), leaving a small buffer, or do I for example put 15% down leaving a larger buffer but more LMI costs?

If your serviceability is good, and have plan in future this ppor become IP. Best to go as small as possible on deposit. Use LMI and setup offset, park spare money in the offset.

Anyway this scenario wins either IP or PPOR. Always us OPM whenever possible, consider risk and cashflow management is must. Reward is result..

 

[rizzle]

I would be living there for a minimum of 3 years, more likely 5+ though. Wouldn't more deposit down = equal better value based on on lower LMI costs (given that tax deductions would not apply).

What is OPM sorry?

EDIT: Forgot to say yes would eventually convert to IP, but not in the short term.

 

[Peter_Tersteeg]

In the case of someone wanting to actively invest, I agree with the general consensus that you're better to pay some LMI and keep more cash. Even if you're not planning anything else in the near future, $2k buffer is cutting it a bit fine IMO. Perhaps a compromise of an 85% loan might be acceptable?

If you were in a position to have a more comfortable buffer after settlement, with an 80% LVR and you had no other short or medium term plans where cash might be useful, then perhaps LMI is an unnecessary cost.

Based on the limited information available it's probably better to pay some LMI and keep some cash. An extended conversation about the pros and cons might come up with a different result however.

 

[Bantam Roosta]

What is OPM sorry?

Other peoples' money.

BR

 

[Chris B]

I would be living there for a minimum of 3 years, more likely 5+ though. Wouldn't more deposit down = equal better value based on on lower LMI costs (given that tax deductions would not apply).

What is OPM sorry?

EDIT: Forgot to say yes would eventually convert to IP, but not in the short term.

Attitude towards LMI depends on your personal preference. A lot of people don't have a problem paying LMI since it increases what they can afford (and then potentially increasing their capital gains). Adding it to the loan can make it easy for people to forget about too.

I generally prefer to avoid LMI as much as possible, although at the 82% or 84% level, it isn't a massive expense.

Citibank have an 85% No LMI product, which works quite well if you fix most of your debt (as the fixed rates are not loaded) but they force you to have at least $20k variable.