Hi People I’ve just bought my first bit of real estate in Queanbeyan, NSW. At present I have the loan on P+I and the rent from the tenant covers every single cost required to cover the loan repayments and holding costs of the place. If i wanted to buy another property in 6-9 months from now how would you go about doing so? And where would you pick to invest?
Save up a deposit and or borrow it against existing property and then borrow the rest secured against the new property. more details in this thread: Terryw’s Ideal Loan Structure https://propertychat.com.au/community/threads/terryws-ideal-loan-structure.6016/
Sorry just want to jump in on this post as I'm in a similar situation but I have saved up 10%-15% deposit. Would you still borrow against existing property and pull out equity to make 80%lvr or would the current deposit amount be sufficient?(if serviceability is not an issue)
If you have less than 20% deposit you would be paying LMI. Best avoided if possible. Think also of the tax consequences of borrowing less than 105%.
Savings is key in your scenario, to eliminate the need to pay mortgage insurance the banks will want to see a minimum of 20% deposit + stamp duty. Or you can draw out equity from your existing property (if any) to contribute to the purchase.
Thanks for the advice @Terry_w & @Tony Xia What about this 88%LVR I've read on even though it means paying slightly less premium on LMI but allows me to get into the market quicker. My current situation is that I have purchased a property 6 months ago at 88%LVR but have some equity even if I refinance at 80%lvr which might just make up for 20%(include current savings) for this second property. There is a current opportunity I can purchase at the moment under market value in a great location. My question is whether I would go down the path I just mentioned OR use my current savings to borrow at 88%LVR and pull equity on both properties in a few months time to use as deposit on my third property. Please correct me if I have misunderstood how this works as I'm still somewhat new to this and getting my head around it.
Have you done a servicing scenario to see if you can obtain a third loan ? If yes then the option of paying LMI on your second and third property would be ok to do, but this is on the basis that there is substantial growth to outweigh the lmi cost on the short term. If you are unable to obtain a third loan then you would obviously borrow 80% and not pay lmi
Not sure what you mean JW. If you are asking whether you should borrow above 80% or not this is something you need to take credit advice on. It will depend on the circumstances. LMI is a waste of money if you can avoid it.
That would make a lot of sense. I will run the numbers tomorrow. @Terry_w I definitely don't deny LMI is a waste of money. I guess I'm weighing up the leverage. Saving another 8% (e.g $30k-$40k) could take another yr or 2? In this time, could I have purchased something that has allowed me to get those gains and also potential growth in the area? With that said, as @Tony Xia mentions only if my serviceability allows it and if the growth can outweigh the difference. I've ran some numbers on that and I definitely think this second purchase now has outweighed the extra savings + LMI. But will definitely look into how serviceability looks for the next loans or whether I can still potentially make the 80%LVR work.
If by paying the LMI you get in sooner and that property increases in value more than the LMI then it is worth paying. But don't waste LMI by, saving your cash and paying it and then finding out that you cannot qualify for any further loans. Strategy: Avoid LMI where your Servicing is Limited (and you have the cash) https://www.propertychat.com.au/community/threads/strategy-avoid-lmi-where-your-servicing-is-limited.18960/
Wow that's perfectly written. Thank you. Ran the numbers today, if everything goes accordingly, I will hopefully be able to borrow at 80%LVR. Thank you both for the advice & info!
How have you run the numbers for serviceability, was it with an online borrowing calculator? Do you have a broker assisting you? if not why not?
Yes, definitely. There is no point in avoiding LMI to try and outsave the market and then the market grows by more than the LMI would have cost in the first place, which will likely happen in a lot of markets in 2021. I've used LMI on some personal purchases and not on others. One example where I deliberately chose to was when I was able to essentially split my deposit amount to buy 2 similar properties in different areas, whereas I would have only been able to buy 1 of them had I chosen to avoid the LMI. Consquently I was able to control a higher absolute value with yield neutrally gearing the properties. Fast forward 8 years and I'm vastly better off by having done that than if I'd chosen to avoid LMI and only bought one. There is a place for it, however be aware of the increased gearing risk and worse cash flow. - Andrew
Thank you and just what I had in mind too. Can I how LMI would affect gearing risk and worse cash flow? Is this based on loan ratio and rent return? Will banks view it negatively and affect serviceability in the future?
It won't affect rental amount. It affects gearing because your loan ratio is higher (higher gearing) and therefore your loan amount will higher, plus the capitalization of the LMI amount onto the loan and therefore your payment will be higher. E.g. $500k purchase (ignoring stamp study for ease of example) and you have $100k in cash for a deposit. 1. 80% LVR with no LMI = $400k loan at 3% IO loan = $12,000 p.a. interest 2. 90%LVR + LMI of (say) $15,000 = $465k loan at 3% IO loan = $13,950 p.a. interest So in scenario number 2, your gearing risk is higher and your cash flow is worse by approximately $37 per week. Yes, the banks will view that negatively for future servicability as it is all based on current repayments/debt amounts and income (generally speaking). Anything that increases your current payments will have an affect on future borrowing. Keep in mind in scenario number 2 that will still have $50k left over which you may choose to offset against the $465k making your net loan for interest calculations only $415k...not that much worse than $400k. However, this assumes you don't have a purpose for that additional $50k. If you're left with little to no buffer on scenario 1, it might be better to have some liquidity and have a net loan amount of only $15k more in scenario 2. Everyone is different but my own personal tolerance on cash buffering has been an absolute minimum of $5,000 per property allocated specifically to that property, per property (cumulative), after any purchase i.e. if you have 3 properties you should have $15,000 in property liquidity outside of any personal savings or cash requirements. This is just from years of experience where it's possible or likely you will face some vacancy in your first year (either soon after settlement if it was vacant possession or at lease expiry) that you will need to fund, and/or some decent maintenance might need doing e.g. I've had a couple of hot water system replacements within the first couple of months after settlement in the vicinity of $2000 a pop. Without that cash buffer, at a time when cash flow is usually at varying degrees of drain after settlement (even if it's not major, you can almost guarantee there will be maintenance picked up very soon after your first tenant moves in), things can get pretty tight pretty quickly. - Andrew
Ok great they should also be able to explain how to buy your second property and answer all you other finance related questions regarding LMI, future serviceability etc etc...
This was very insightful! Thank you. I guess it comes down to weighing up the cash flow/serviceability with cash buffer. I've crunched some numbers as I've aimed for 80%LVR with this second property but need some extra cash for reno then leave the $5k buffer, pretty sure I'll need to change the hot water system soon from what the building inspector has said cutting it close... They have done most of it, thank you. Is it possible to calculate future serviceability up to multiple properties? And how accurate can it be?
What does your broker say when you ask them?? Broker should be crunching the numbers for you. Of course it's possible.
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