Hi Everyone,
This should be an easy question. I’ve been reading up on Lenders Mortgage Inurance (LMI) and I’ve paid it once before but don’t want to be slogged with it again.
Hypothetically situation :
Purchase price of property – $80,000
Price now – $120,000So that leaves $40,000 in equity to borrow against for another property. Is that correct?
With a loan-to-valuation ratio (LVR) of 80%, that means you could borrow a total of $200,000 (using the $40,000 equity) with paying LMI ??
So the person in this situation could purchase another property worth up to $120,000 without paying LMI?
This does not account for legal, stamp duty and other purchase costs.
I hope this makes sense and will help me understand these concepts better.
Cheers,
NigelThere is ‘real’ equity and ‘useable’ equity. In your example, the $40,000 is ‘real’ equity. In reality, you would not be able to use the whole lot. Many lenders will do 90% and the odd one will go to 95% but I do not know any who will let you use the whole 100%.
To avoid mortgage insurance on your current property and a new purchase, you could only borrow $16,000 (80% LVR) on the current property. This would need to pay for 20% deposit and costs on the new property. If you had the costs, you could buy a new property for $80,000. This would be less if you had not cash.
Some of your figures have thrown me off though as they do not make sense. I hope the above helps.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksAn easy way to work it out is to add up the security values and x 80%, then minus your current loans.
240,000 x 80% = $192,000 – 80,000 = $112,000 borrowable without paying LMI.
Terryw
Discover Home Loans
North Sydney
[email protected]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
Oops, I didn’t explain that very well.
The situation involves two properties – one they currently own and looking at purchasing a second one. These are not real figures but I’m trying to work out some concepts. Probably very easy for some people but I have to start somewhere.
Amount owed on existing property – $80,000
Today’s value now – $120,000So that leaves $40,000 in equity to borrow against for another property. Is that correct?
With a loan-to-valuation ratio (LVR) of 80%, that means you could borrow a total of $200,000 (using the $40,000 equity) without paying LMI ??
So the person in this situation could purchase another property worth up to $120,000 without paying LMI?
This does not account for legal, stamp duty and other purchase costs.
I hope that makes better sense.
Cheers,
NigelNigel, you wrote the same thing. Where are you getting $200,000 from a property worth $120,000.???
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksI got $200,000 from the $40,000 equity in the first property (Value $120k minus amount on loan of $80k).
$40k being the deposit to get the loan of $200k.
If the person had this $40k in equity, couldn’t he buy another property worth up to $120k so the total of his portfolio is $240k (using $40k equity as a deposit for the $200k loan). He would have a loan of $200k but own $240k in property.
Cheers,
NigelIt doesn’t work that way. Everything is based on the property prices.
If you have 80k owing on a 120k property, you could use only 16k of the equity (more if paying mortgage insurance). I have outlined this above.
Assuming you don’t want to pay mortgage insurance, your ‘useable’ equity is only 16k.
If you don’t have any other money, you would only be able to buy a new property for around 70k. This is 14k deposit to avoid mortgage insurance and allows only 2k for closing costs. You may need a bit more. The loan on this property would be 56k.
To summarise:
80k Existing Loan
16k Equity Draw Down
56k New Loan152k TOTAL
190k Total PropertyThe best thing to do is sit down with a mortgage adviser / broker and go through the figures properly so they relate to your situation.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential LinksI think I just understood what Mortgage Advisor is saying –
Original Property owing $80k
Worth $120k
Equity is $40k
BUT, you must keep 80% LVR on this property.Therefore 120*20% = 24k of equity you must keep in this property. So of you’re $40k equity, you can only use 40k – 24k = 16k
If you want to skip LMI on your next property, then using your 16k you can borrow at LVR 80% = $80k.
Hope that clears things up.
PS. I’ve just started investing, but I went for LMI to get a 90% LVR on a property of just over 100k it costs less than $1000. I capitalised it, so it only costs approx $50 per year in interest.
You don’t have to keep 20% equity in the first property. You only do this to avoid mortgage insurance or higher interest rates.
My point is that 40k does not turn into a 200k loan at any time. You need to know the purchase price and LVR of the next property to find out what the loan is going to be. Everything is pinned to the property values.
The Mortgage Adviser
http://www.themortgageadviser.com.au
[email protected]
Essential Links
You must be logged in to reply to this topic. If you don't have an account, you can register here.
