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80% LVR lend v LMI lend for first IP

Discussion in 'Property Finance' started by Phil_22, 30th Jul, 2015.

  1. Phil_22

    Phil_22 Well-Known Member

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    Hi All,

    Just looking for peoples thoughts when starting out for that first IP.

    Do you want to ensure you have that 20% deposit or are you happy to go in with a deposit < 20% and cop the LMI fees?

    Any thoughts either way are appreciated.

    Cheers,

    Phil
     
  2. Hodor

    Hodor Well-Known Member

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    LMI all the way for me when starting. It depends on your goals and risk tolerances however.

    Trying to minimise it now and reduce LVR as my portfolio grows.
     
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  3. Phil_22

    Phil_22 Well-Known Member

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    Thanks Hordor...

    The lending institution I am looking at only offers IO loans for Investment purposes with and LVR of 80% or less (very low interest rate and fee structure however), so I suppose I am weighing up the pro's and con's....

    Cheers,

    Phil
     
  4. blackenator

    blackenator Well-Known Member

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    I have been and probably always use LMI as long as I am allowed to. LMI is a great tool to help your money go further. Also just say you want to buy a property for 500k to have a 20% deposit you will need 100k. Say for example you have 80k and will need another few months to get the other 20k and the market may have moved and now you need 120k instead of 100k. Hope that makes sense.
     
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  5. Phil_22

    Phil_22 Well-Known Member

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    Thanks Balckenator that makes sense for sure.
     
  6. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    It depends a great deal on what you hope to achieve in the future. It also depends on the lender you're looking at - what's their cash out policy like? Servicing? You need to know the answers to these questions before making a decision.

    The question is not as simple as it seems, as getting it wrong can cost you in the future.
     
  7. Phil_22

    Phil_22 Well-Known Member

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    Hi Jess,
    Debt Servicing Ratio of < 95%
    Sorry not sure what you mean by cash out policy?
    Cheers,
    Phil

     
  8. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    The general advice you'd get around here is to pay some LMI and preserve your cash for the next purchase. LMI can be the cost of acquiring more, faster and many (including myself) think it's worthwhile.

    These days lenders are less likely to agree with this however. They are seeing this approach as overly aggressive and with all the changes occurring, there may be arguments to keep your investment lending to 80% in the future.

    I don't know that we're at the point where investment lending needs to be at 80%, but I can see scenarios where it would be beneficial in the future. A lot of it could depend on your personal circumstances such as income level, existing debts, equity position, etc.
     
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  9. Phil_22

    Phil_22 Well-Known Member

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    Thanks for your response Peter.

     
  10. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Totally depends on your situation and strategy.

    These days - I wouldn't be relying on releasing equity above 80% with a bank - so for that reason, if you're wanting to purchase multiple properties in a short/medium timeframe then pitch in a smaller deposit and retain the rest to fund the next purchase.

    Cheers

    Jamie
     
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  11. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Just bear in mind that if your bank isn't overly generous, even if they do allow equity releases over 80% in the future there's a high chance you won't be able to do it if you've bought more property in the meantime, because you won't service on their calculator.

    In these situations, you'll have to refinance to another lender to get the equity out, and pay LMI all over again.

    Which lender are you looking at?

    In the end, it boils down to this - 80% gives you increased flexibility, 90% allows you to buy more property more quickly. Your choice :)
     
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  12. Phil_22

    Phil_22 Well-Known Member

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    Thanks Jamie, yes the plan will be to have multiple properties in the medium timeframe, so looks like LMI might be the way to go.

     
  13. Phil_22

    Phil_22 Well-Known Member

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    Thanks Jess, yes that's the conundrum flexibility v quick adds to portfolio.

    Lender is a large credit union based in the eastern states of Australia.

    I have a contact on the inside there at the credit department who is also providing me some advice in terms of there policies...

    The attraction to this lender is twofold - great relationship and excellent interest rate I can obtain.

     
  14. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Borrow 105% where possible. If you don't have another property you can borrow against then consider related party loans.

    You don't want to tie up 20% of your cash as you will be losing tax deductions down the trac when your buy a main residence.
     
  15. Phil_22

    Phil_22 Well-Known Member

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    Thanks for the reply Terry.

    I have a PPOR with about $50K equity and just working different options.

     
  16. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    You'd definitely want to use that equity toward the IP - make sure you get it set up correctly though.

    Separate split for equity and no x-coll if using the same lender.
     
  17. Phil_22

    Phil_22 Well-Known Member

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    Thanks Jess.

    Yep will be looking to ensure I have the best structure possible that is both tax effective and will allow for further IP purchases with growth in equity.


     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    In that case you wouldn't want to use 20% cash deposit as you will be throwing money away.

    $500,000 IP with 20% deposit = $100,000
    at 5% it means $20,000 per year in interest on this deposit.

    Struturing this wrong means you will be losing $10k approx per year for 30 years.

    Pay down the non deductible debt and reborrow under a separate split.
     
  19. TheSackedWiggle

    TheSackedWiggle Well-Known Member

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    Just curious how is it 10k per year for 30 year?

    According to my calculation
    #. For 95 lvr deposit required: 5% deposit + 3% lmi + 4% (stamp duty/misc cost) = 12% (initial capital required)

    #. For 80 lvr deposit required: 15% deposit + 0% lmi + 4% (stamp duty/misc cost) = 24% (initial capital required)

    Hence the deposit differential between 95 & 80 lvr is 12%
    ie the initial deposit not required by going for a 95 lvr loan

    So on a 500k property deposit differential between 95 & 80 lvr is 60k (ie,12% of 500k)
    with 4.5 IR the interest paid on 60k deposit/year would be 2.7k/year

    NG benefit on 2.7k on a marginal rate of 37.5% would be 1.12k/yr
    NG benefit on 2.7k on a marginal rate of 30% would be 0.81k/yr

    So according to my calculation, assuming loans are IO, one has paid an upfront LMI of 15k to get savings of 1.12k/year for 30 yrs?
    Note: If one is one a lower marginal tax rate saving is lower and vice verse.

    How did you get 10k saving per year? What am I missing?


    PS: I think one can negotiate a better interest rate on a 80 lvr, that will further reduce the interest paid slightly.
     
    Last edited: 31st Jul, 2015
  20. Phil_22

    Phil_22 Well-Known Member

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    With the finance provider I have there are 2 options

    80% lend and I can do it IO repayments with a current variable interest rate of 4.09%

    or

    LMI lend with P&I repayments with a current variable interest rate of 4.09%

    Thoughts?