Hi Guys
I recently atteneded an investment seminar in perth, where they were supported by a represenative from a finacial instituion.
What they were claiming is, that it was more beneficial to borrow at a higher LVR and pay the LMI as lenders were more inclined to approve your loan application and lend you money if there money borrowed was protected by a LMI policy.
What do you think, is it worth paying that little extra to achieve the larger borrowing capacity? Is there any down sides? What do the savvy investors do?
Thanks
Wayne
Loan Mortgage Insurance is insurance that the bank takes out to protect THEM in the event of a loan default. This should tell you that the bank thinks your debt level is probably too high for their comfort – they think it is at a high level of risk.
All banks have their own policy on what they will lend without LMI and it is usually around the 80% mark. This means that they think at this level, or lower, the risk is acceptable (for them).Without sounding too cynical ( and believe me; I am), you have to try to seek out people’s agendas as there usually is one hidden somewhere. This seminar guy is in the business of selling money – the more he sells, the more he makes in commissions I suspect. Many “seminars” are really sales pitches disguised as an education session. This could be just another one of them.
In fairness, he may be totally above board, but it pays to be your own devil’s advocate.If you can only get into a deal by taking out LMI, then so be it, but it adds to your costs, so the return on the investment has to be higher to begin with to cover this cost.
Some people regard LMI as a way to more leverage to increase your return, which is true, but you should try to balance returns with risk.In the end it all comes down to how you feel about the risk associated with a deal.
My view is to avoid LMI and still get a good return, but with more safety. You don’t need to be greedy.
In these situations I like the quote from Warren Buffett; “I made a fortune out of buying too late and selling too early”. This means he wasn’t greedy; he was cautious – and still did rather well.Cheers,
Marc.
[email protected]Yes, LMI protects the bank, so they may be happy to reduce their risk. But the approval criteria is actually more strict for LMI loans, so it is harder to qualify as you have to pass the bank, and then the LMI company’s criteria.
Whether paying LMI is worth it or not depends on your circumstances. When starting out I got 95% loans to reduce the deposits needed and keep my cash for other things. When you think of the compounding effect, buying many properties as quick as possible – in a few years the growth will have, hopefully, made paying all that LMI worth it. And, I always capitalised my LMI, so I didn’t have to pay it out, but still could claim a deduction.
Now I am more conservative, and avoid it. Funny how we change.
Terryw
Discover Home Loans
[email protected]
Send an email to get my newsletter.Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Thanks Terry & Marc for your input.
I am having trouble convincing lenders that i can service the loans, and the fact that LMI protects the lender, i would assume that it would be easier to ontain finance.
Terry, as you have pointed out, you still have to pass the LMI’s company criteria. I thought that i would only have to satisfy the lenders criteria, not both, if the bank thought i was too high risk, that they would just not approve the loan, eliminating the LMI’s company involment.
Marc, i realise that every seminar has an objective, which generally equates to selling you something, but to stay actively involved in investing, i find myself looking for any leverage that i can to achieve this and get around some of these brick walls.
Regards
Wayne
Fair point;
I just wanted to make sure you were attending these seminars with both eyes open. I don’t want to see you get burnt.Cheers,
Marc.
[email protected]The other issue is Wayne in the main there are only 2/3 main insurers with a couple of other self insured lenders and the odd fringe insurer so your choice is not that large.
One of the tricks is to work with a mortgage broker who nows the + / – of each MI and then can put your deal to a lender you uses that particular MI. Where the lender uses both most lenders will give the MB the initial option of who they wish to the loan to be proposed to first.
In saying all this your perceived problem with LMI may not be such a problem after all once your Broker has had a look at the complete picture.
Cheers
Richard Taylor
Residential & Commercial Finance Broker.
Licensed Financial Planner. Ph: 07 3720 1888
[email protected]
Looking for life cover – We Guarantee to beat any quote you have in writing.Richard Taylor | Australia's leading private lender
Hi Wayne. You mention you are having trouble convincing the lenders you can service the loan – you will find that your application will not even reach the LM insurer until the bank or lender confirms your ability to service the loan first, which each do by having their ‘own’ calculator. If this is ok, then they will process your application, at which point the LMI companies have a look. Stuff can still get knocked back then, and as the others have mentioned, the higher the LVR, the more ‘risk’ is perceived by them. Borrowing 85% for example is almost a no brainer for them, but 95% most want to see genuine savings, (and offer reduced mortgage insurance premiums for this) and the 100% loans are being very heavily scrutinised at present. All the best anyway with your ‘journey’.
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