20 percent the new norm.

I'm beginning to think that 20 percent deposit is the new norm for most people now. Even at the "acquisition" phase.

Together, my wife and I get an average wage, own an affordable PPOR and are slowly chipping away at it....we're doing OK. I want to buy a zillion properties tomorrow but doing my own numbers it's becoming increasingly clear that it's not worth it unless I can put in a 20 percent deposit.

Once the LVR is 80 percent there's no LMI, the interest rates go from 5-6% to 4-5% and IO is still on the table. This is factoring hugely into my yield (and safety) calcs.

I tried everything to do the 10 percent deposit "acquisition phase" strategy....but I can't for the life of me make it work safely anymore with 5-6% yielding resi investment property.

It might work if we were earning far more, and there's always the buy another PPOR and turn the old one into an IP strategy....but I am thinking that for most mere mortals out there wanting to buy an IP it's 20 percent or bust?

@Jess Peletier Am I on the right train of thought here or are there servicing tricks I'm not thinking through?

Anyone else in the same boat?

 

It makes sense to now go with an 80% lend early on (which is not hugely conservative anyway).

Then down the track use equity to purchase at 100%. The equity forms the 20% deposit and 80% obtained with a separate loan.

This may sting your ongoing out-of-pocket cashflow but will give max tax deductions and is the better measure of return on investment

 

As New Town says, it may be a good strategy when starting the portfolio. It allows you to position the first purchase as the portfolio builder so you can value shop and continue extracting equity to move forward faster. Once int he LMI territory, the options can be limited..

Do you mean you will readjust the LVR down to 80%? What's the reason you'd do that? The loan will lose the benefit of the LMI once you do re-adjust the LVR down.

It's actually making sense to pay P&I rate in many cases. Especially mid July when CBA & WBC IO rates went as high as 5.5%!!! And WBC were offering 3.88% 2 years P&I fixed. On a $370k odd loan, you would pay $45 extra per month and yet bring the principal down by $14k in 2 years as opposed to remaining IO.

Some major lenders are doing IO rates at P&I rates. Unheard of in this climate.

 

I tend to disagree - using lmi early is ideal as it allows you to leverage and not spend years saving. You can still use the equity for number 2 if you choose the right lender to start with.

 

Sorry I wasn't clear. I mean once you have a 20 percent deposit finance is much cheaper. No lmi, better rates etc..

 

This is true in most cases. The problem for most is that saving the 20% plus costs is prohibitive, and when you consider how much the market can move while you're saving, you can find yourself consistently behind the 8-ball as the 20% mark keeps on moving.

 

I am in the same boat kind of. Except I suspect it will take significantly more than 20% deposit for my next purchase. I'm not fussed if it requires a 30% or a 40% deposit, I will just save up a bit longer. It means the property will be very cashflow positive from day 1, which is good.

 

I would try and use and leverage LMI where possible but to add to this there are some variables to consider. The IO vs P&I debate is also dependents on certain variables.

Borrowing capacity - some lenders namely Westpac, CBA, St George etc penalise your borrowing capacity if you are IO lending whereas lenders like Pepper and Liberty don't since they work off actuals or actuals plus loading. So if you have hit your borrowing cap post one purchase then it may make sense to go 80%.

If you haven't hit your borrowing cap limit but can purchase an additional property then it may make sense to go LMI so you have more funds for subsequent purchases. If the next purchase would need to be with Pepper or Liberty then you may need to go IO in order to service with Pepper or Liberty. You can always go back after the Pepper and Liberty purchase and revert the existing loan to P&I repayments.

If you decide to go into LMI territory then you would need to ensure you use a lender that has ideally their own DUA, good servicing (so you can go back and extract the equity) and good cash out policy. Last thing you want to pay LMI and not be able to reuse the LMI credits at a later stage. In other words think twice before going LMI with lenders like Bankwest and ING. I would even throw Suncorp in there as their borrowing capacity is very conservative even though they have their DUA.

Then to add to the complexity that is lending - you may decide you want to go 90% however there are mortgage insurance related issues that prevent you from borrowing over 80%.

In terms of pricing some lenders such as Westpac don't discriminate on LVR so they will give you the same rate at 80% as they would at 90%. Westpac has been very aggressive on their IO rates even at say 90% - they are currently sitting around the 4.70%-4.80% mark depending on the loan size.

So in a nutshell there is no rule on whether you should go IO vs P&I or 80% vs 90% - the answer will be dependent on how many properties you are looking to purchase in what time frame, your borrowing capacity and your risk appetite amongst many things.

 

I have an 88%LVR loan and have paid LMI. If my LVR comes down to 70% and I want to extract 18% equity bringing the loan back to 88%LVR, would I have to pay LMI again?

 

You pay the difference - so lets say you paid $10k in LMI when you first did the loan and topping up the loan (or doing the equity release) will cost you $12k in LMI. You now pay the difference which is $2k.

This is what I mean by "reusing" the LMI credits.

 

speaking of "LMI credits" - have any of you had an LMI exception applied in example of an equity release? for example, client had an LMI waiver up to 90%, theyre now no longer eligible for waiver but with existing loan wants to top back up to 90% ... have you had the lender continue the exception or must LMI now be acquired