How to use LMI effectively?

Reading through another thread I read one of those pearlers of advice which is quite obvious after it's been pointed out. Roughly it was along the lines of strategy and planning for what runs out first, equity or serviceability.
When starting out with a reasonably high income but only $150k in cash (no other equity) Is there a 'sweet spot' with LVR / LMI to maximise size of your portfolio.
If I jump in and buy 4 x $250k properties at 90% lvr by the time I've paid stamp duty and solicitors there nothing left to purchase more. If LMI is included in the loan it may push the LVR to 92%. Further I assume you cant draw down on any equity that is generated until it exceeds 80% which may take a while.
If I buy one property @ $600k at 80% LVR then again after stamp duty and solicitors no more funds to purchase but I avoid LMI and presumably can draw down on any equity that is generated.

I'm not sure that my figures are entirely accurate but the question still remains, is there a sweet spot to utilise LMI or is it a cash flow Vs capital growth (Holden vs Ford) type question

 

There is a sweet spot for the LMI cost at around 88%, but I'm sure people with more knowledge of it than me will have a more comprehensive answer to your questions.

 

See my tax tip of today - it will probably actually put money in your pocket during the first 5 years if you borrow to pay LMI.

Get it while you can is my motto - having 4 properties growing and incurring LMI would be better than 1 property and avoiding it - as long as there is growth.

The more loans you get the harder it will be to qualify for higher LVRs and LMI

 

It depends on what you're going for, some people advocate going with 80% deposit, then refinancing to 88% with LMI later when it's increased in value. So many options and things to keep in mind.
You're probably aware from the other thread you mentioned, but don't forget LMI is deductible over around 5 years.

 

Tax tip of the day? Where abouts Terry?
I've always thought it would be best to put down as little as possible but never considered the reduced equity position because of a significant LMI cost and then the eventual wait for equity to grow to be able to redraw and continue purchasing.

Deductible? really, I thought it would have been a capital expense.

I did a couple of scenarios on a spread sheet with 80%, 85% & 90% lvr and for the first few years the 80%LVR generated the most 'available equity' to draw down on. It took about 5 years for the 90% LVR to overtake and have more 'available equity' to drawn down on and then the difference accelerated from there.

My risk tolerance is high and would gladly borrow 105% if I could

Thanks for the advice.

 

Yep, for realsies.

My brain's not working at full capacity on a Sunday night but, using 10% percent to control the same asset as 20% has to be better, surely. Plus you've got the rest of the funds to use for another purchase. Use as much of the banks money as you can - unless it looks like things are going to hit the fan obviously.

 

you should be borrowing 105% for every purchase.

See my tax tips in the tax section and the legal tips in the legal section.

Especially Tax Tip 33: Deductibility of LMI https://propertychat.com.au/community/threads/tax-tip-33-deductibility-of-lmi.3425/

 

Whilst I have used LMI for my 2 IPs thus far(88% & 90%)my decision was one based on using OPM but also saving money to leave in a buffer for any "oh ****" moments.

 

Wow - are there any lenders doing that in the new lending climate?!?

 

Yeah it's just not as easy.

Banks that allow it will want to see "proof" of what the funds will be used for which generally means they want to see a contract of sale for the property you anticipate buying - and if that debt doesn't service on their calculator, it's no deal.

In the current climate - I'd borrow 88% for the purchase rather than relying on releasing equity to 88% post settlement.

Cheers

Jamie

 

Yeah, it can take a while and you might have to jump through a lot more hoops but it's doable. The better your credit file is, the less hassle it will be.
We were able to move over to a new lender like this a couple of months ago when all of this APRA nonsense was starting to have an effect. CBA.

 

Good advice, I would do this straight up if you're able to.

 

Hey Terry what with "105%" means? Property cost plus LMI?

 

Just trying to understand why we always mention 88% not 85 or 90%?

 

The borrow at 80 and refi up to 88 is risky business - i wouldn't rely on it with lenders taking on a 'risk' perspective to lending more and more nowadays and finding reasons to say no. A high LVR cashout is always risky.

 

The cost of LMI is like an exponential curve depending on the LVR and the loan amount.

88% is viewed as the 'sweet spot' for the cost of LMI.

Going up to 90% LVR increases the cost of LMI by ~35-40% from an 88% LVR. The increase from 87-88% is marginal in comparison.

 

From memory, it's 90% + capitalising the LMI costs, so approx 88%.

 

Good tool to give you a guide on what LMI you will pay and also the steeped affect going over 88% LMI will cause to your costs.


http://www.genworth.com.au/online-tools-forms-and-reports/lmi-tools/lmi-premium-estimator

 

100% of the purchase price and the stamp duty and all associated costs

 

Ok ... got it. Was just confirming if there is any other trick when we say 88%.