Cop LMI for IP to keep equity bucket fuller?

Discussion in 'Loans & Mortgage Brokers' started by Jasper, 1st Jun, 2017.

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  1. Jasper

    Jasper Well-Known Member

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    Hi people

    I've been advised to borrow 90%, use 10% equity and cop the LMI for this investment property (rather than borrow 80% and use 20% equity), so that I'm keeping the extra 10% equity available for the next property.

    Is this good advice? If not, why?

    Thanks in advance
     
  2. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    @Jasper - without knowing your specific circumstances, depending on your goals, this may be a good approach.

    Better to hold back as much of your funds as possible, specially if you are looking to expand your portfolio.

    Note lenders are progressively shifting to principal & interest repayments for LVRs over 80%.
     
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  3. Mogley

    Mogley Member

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    You also need to take into account the opportunity cost of delaying purchase due to insufficient funds if your view of the market is that capital growth will exceed the cost of LMI...
     
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  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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  5. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    I will add to the confusion

    sounds like red or black to me ?

    The challenge is when we ask those questions, and arent aware there is 0 or null in the game we may get very surprised.

    You are seeking some education which is great, once you analyse your resources, you goals, and your risk profile in a structured manner............. bingo !

    ta
    rolf
     
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  6. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Get the broker or banker to run the numbers on 80%, 88% and 90% LVR as LMI skews at these LVR points.

    It also depends on the loan amount - generally makes more sense to pay LMI on lower loan amounts than higher ones.

    For example, the LMI on a $400,000 purchase price at 90% LVR is approximately $7,500 (its $4,800 at 88% LVR). That equates to 0.01875%

    However on a $800,000 purchase price at 90% LVR the LMI is approximately $19,000 (its approximately $12,000 at 88% LVR). That equates to 0.02375%.

    So you can see that the increase isn't linear.
     
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  7. Jasper

    Jasper Well-Known Member

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    Really interesting comments. Especially your link Terry.

    More facts:
    I have $220k in cash offsetting an IP.
    Already own my PPOR outright.

    The property in question is $500k.
    The LMI will be $10k.
    My borrowing capacity is $550k (which ignores the fact that I have cash, as it's in an offset and hence, could be spent the very next day - in the eyes of the bank)

    I want to continue to expand my portfolio but would need to wait a few years for capital growth in order to buy again
     
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  8. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    If you own the PPOR out right, wouldn't you have decent amounts of equity to proceed to purchase beyond the purchase you're considering?
     
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  9. Jasper

    Jasper Well-Known Member

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    My portfolio is as followed (using figures from 3 years ago and yes, i know they'll gone up):
    Ppor $750k own outright
    Ip1 $320k offset $220k
    Ip2 $425k offset 0
    Ip 3 is what I'm hoping to buy.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Without knowing your full details I would suggest you consider using the cash for 20% deposit.

    You have heaps of equity which you could tap into later on if you can service. If you can't service you won't be buying anymore property anyway.

    On the other hand this could delay your retirement. It might be better to keep the cash and borrow against existing property and borrow 105%>

    This way you have cash for living expenses and you won't be paying anymore interest if you use an offset account. I have written a strategy tip on this too.
     
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  11. Jasper

    Jasper Well-Known Member

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    We are early 30s, so retirement is a long way off.

    I'm assuming our equity is good but it's our servicability that may be low (we are both working part time for the next 4 years until our youngest starts school). This gives us a combined income of $140k (it would be $190k if we went back to full time).

    So now I will reread your posts with this in mind and see if I can understand it (I'm still learning clearly :) )
     
  12. Jasper

    Jasper Well-Known Member

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    Thanks for your patience. I still need a bit of guidance please :)

    I've decided I will go 90% and cop the LMI. But my question is, which account do I take the 10% from??

    My options:
    - OFFSET - I have a 215k cash offsetting IP1 loan of $223k. 4.91% which I'd try negotiate lower if using this account
    - LOC - This is equity from our PPOR. There's 175k available. 4.39%

    Let's pretend the interest rates on each account are the same. Does it make any difference which account I use?

    Thanks for educating me.
     
  13. Property Twins

    Property Twins Mortgage Brokers & Buyers Agents Business Member

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    Hi @Jasper
    Ideally hold back on cash in the offset account, and use the PPOR equity.
    Have you discussed the two options with your broker?
     
  14. Jasper

    Jasper Well-Known Member

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    Yes. He said to use the LOC.

    Can you explain why this is a better option? Thanks so much
     
  15. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Borrow to pay the LMI can claim the interest.

    Keep cash in the offset and save non-deductible interest.
     
  16. Jasper

    Jasper Well-Known Member

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    Thanks Terry.

    If I take money from the offset, the money would still be tax deductible because its offsetting another IP right?
     
  17. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Yes that is true - if the underlying loan is deductible when you remove cash the interest deductions would increase.

    But if you need that money in the future for private expenses it might be tied up in the property. Also your LOC appears to be a lower rate than the loan with the offset. I would still borrow it - you can always pay it off later but if you use cash you cannot replace it with a loan later and be able to claim the interest.
     
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  18. Jasper

    Jasper Well-Known Member

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    That makes perfect sense. Thank you Terry and everyone else for your help.
     
  19. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hi Jasper

    I don't think anyone here can really provide a decent response without knowing the intricate details of your financial situation/future goals. There's way too much to consider when tossing up between a 20% deposit or smaller.

    On that note - there aren't a lot of lenders keen on 90% + LMI IP loans these days. The max is generally around 90% incl of LMI which is really an 88% loan.

    As mentioned above - there's been a general shift to P&I repayments for loans above 80% LVR too.

    Cheers

    Jamie
     
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