I am interested to see what other investors think about LMI and if they prefer to avoid it by keeping under 80% LVR or if they prefer to utilise it to further leverage their investment portfolio.
I understand LMI is tax deductible over 5 years however when aiming for positive cashflow properties it is another expense on top off stamp duty which would make it harder to get higher rental yields?
Another thing which I find hard to understand is I hear people talking about buying below market value however how does this work when they apply for finance, as the lender will normally go off the lower of the Contract of Sale and Valuation price? Therefore not creating instant equity? Am I missing something?
Hope to hear some people's opinions on the matter!
Jacqui
If you can avoid it great……. but if you can't it is a necessary evil.
Thanks Jamie and fredo_4305 for your comments.
I have paid LMI on my first property as i did not have the 20% however what your saying Jamie is that it is worthwhile to use it in the early days to get ahead quicker?
When I have enough equity to be drawing 20% deposits + stamp duty for IP's is that the way to go as it minimises your risk?
I have $100k LOC available and I am tossing up whether I use this for for 2 x 10% deposits + costs (as I dont think you can do 5% on IP loans anymore?) or just a 20% deposit + costs.
I know they lend up to 95% on O/O loans – so I guess there is away around it if servicing still is satisfactory, and then the property can be later leased out etc?
Cheers,
Jac
Hi Jac
You can still get 95% loans. You'll probably need to have an existing relationship with the lender offering them though. Which banks are you a customer of?
That said though, 95% loans aren't easy to get approved. Personally, I'd be inclined to go for the two IPs with the 10% deposit on each.
Cheers,
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I think it is probably worth paying for in the early stages.
Try to get it added to the loan, so that it does not come out of your pocket, but you will still be able to claim it as a deduction (over 5 years).
Also consider if the long run the amount paid will be insignificant compared to the growth.
I remember I paid something like $5,000 LMI on a $200,000 property. The bank person made a mistake and told me intitially LMI was around $2,000 so I wasn't happy and was even going to pull out of the deal. But lucky I didn't as that property tripled in value over the next 5 years.
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
Also consider using less cash may mean you have more cash for your PPOR loan or offset account saving you non deductible interest too
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 Terryw/Jamie, I will probably go with the 10% deposit capitalised onto the loan. I dont intend to use any of our own cash savings, will be drawing all costs from LOC. I'm keen to accumulate IP's within a short timeframe so I think its beneficial to pay the LMI.
Appreciate your help guys!
Jac
Jac,
I’ll play devils advocate because you did ask for pros an cons…
The risk is substantially higher when gearing at this level. Jamie M pointed out the benefits of gearing when prices grow. Gearing will enhace the results either direction in the property market.
For example.
If you are geared at 80% and the market dips 10%. You lose 50% of your equity.
If you are geared at 90% and the market dips 10%. You lose 100% of your equity.
If you are geared at 95% and the market dips 10%. You lose 200% of your equity… Now equity is negitive.If you take the US and UK markets as an example. If you had 3-4 properties and were geared at 90% or even 80% a few years ago, you went bankrupt.
Property investors (compared to owner occupiers) in Australia are up to 5 times more likley to default (based on major banks current arrears / loans in collections).
Moral of the storey is gearing has benefits which are listed by other people above. It is also a tool that was previously adopted by every bankrupt in Australia.
For every millionaire in Australia that got their through gearing. There is someone else that lost everything due to unexpected circustances – e.g. Lost employment when they had a neg geared property portfolio.
I love gearing. But I understand the risk. Make sure you do to.
The common similarity between Millionaires and Bankrupts: is gearing!
Good point Banker.
Similar to gearing with a Managed Fund.. I have a margin loan attached and when the market is on the rise so is the value of my managed fund but when the market takes a dive, the value of the fund sure takes a hit.
I would think when your portfolio grows it would get too risky to rely on approval from Mortgage Insurers as they normally have a max total holdings they will cap it at?
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