How to use LMI effectively?

I think it should be 87% for the properties below $500k. just worth noting

 

Nope all straight forward..

Example 500K Property @ 12%(Your Deposit Costs) =60K Deposit + 5% of Purchase Price for Stamp/Legals Approx(25K)
Total Funds required from you 85K

Bank Loan 88% of Purchase Price= 440K

 

It keeps the total LVR below 90, most lenders want you below that as part of policy for investment loans.

 

Two main reasons.

The LMI is relatively cheaper (compared to 90 and above).

Credit scoring of lenders is less harsh (generally speaking) for deals under 90 - which is what you've got when putting up an 88 + LMI

Cheers

Jamie

 

Hmmm - doing some calculations, there are definite statistical sweet spots:

• 87% for 300-500k is best statistically overall, and for the $300-500k bracket, as (for $500,000) by paying an extra $45 you get to keep an extra $5,000 in the hand
• 89% is barely the statistical best for the <$300 bracket
• 88% is barely the statistical best for the $500-600k bracket

 

Think back 30 years in the past and imagine you purchased a property with 87% LMI v 90% LMI - in the long run a few points won't matter too much

 

Good point! But in the meantime, that extra $10-15,000 in the pocket on a $500,000 loan could be useful ... except that increased serviceability makes it harder to spend it!

 

Based on that table Salz provided, and I don’t know its origin:

$500,000 loan

at 90% = 1.919% = $8,635

At 88% = 1.602% = $7,049


That is a different of just $1,586. Still a significant sum, but nowhere near $15k (maybe you accidentally place an extra 0 at the end?)


Think of it another way putting in an extra $10k cash would mean a saving of $1,586. That is the equivalent of a 15.86% return.

 

Source:

https://www.homeloanexperts.com.au/lenders-mortgage-insurance/lmi-premium-rates/
Full doc LMI premium rates...

 

Sorry Terry, I wasn't clear. At $500,000, each 1% is another $5,000 to either put into the loan or keep in the pocket. So I was saying that going to 90% vs 87% means another $15,000 kept in the pocket for a relatively minor increase in LMI (BTW, I think you meant 1.388% rather than 1.602% in your example).

For $500,000,
at 90% = 1.919% = $9,595 LMI, paying $50,000 outofpocket
at 89% = 1.919% = $9,595 LMI, paying $55,000 outofpocket
at 88% = 1.388% = $6,940 LMI, paying $60,000 outofpocket
at 87% = 1.388% = $6,940 LMI, paying $65,000 outofpocket
at 86% = 1.146% = $5,730 LMI, paying $70,000 outofpocket
at 85% = 1.146% = $5,730 LMI, paying $75,000 outofpocket

Remove the 89% and 87% and 85% as you pay the same as the next one up but have to put up another $5,000 for no real benefit. This leaves:

at 90% = 1.919% = $9,595 LMI(added $2,655), paying $50,000
at 88% = 1.388% = $6,940 LMI(added $1,210), paying $60,000
at 86% = 1.146% = $5,730 LMI, paying $70,000

so:
at 90% compared to 86%, you keep $20,000 in your pocket for $3,865 extra LMI
at 90% compared to 88%, you keep $10,000 in your pocket for $2,655 extra LMI
at 88% compared to 86%, you keep $10,000 in your pocket for $1,210 extra LMI

The second is worse than the third - keep $10,000 but pay for LMI. That leaves only the first or third:

at 90% compared to 86%, you keep $20,000 in your pocket for $3,865 extra LMI
at 88% compared to 86%, you keep $10,000 in your pocket for $1,210 extra LMI

At this point, it more depends on whether you want to keep $20k or $10k available: if $20k, you pay another $2,655 for access to that $10k.
For some it would be worth it (over the long term), whereas for many the 88% hits the sweet spot for this category in the table (the $500-600k category).
Of course other things impinge too: credit scoring as per Jamie's, ability to go to 90 versus 88 with some banks, etc.

For the $300-$500k category, doing the same sums, I like 87% best.
For the <$300k category, I like 89% best.

 

Ok, this is a question that i need answered!

Say i buy a property at 90% loan and add the LMI on top.
I then want to change lenders. When i change lenders they want me to pay a new additional LMI as I'm not less that the 80% no LMI.
Can i claim the first LMI i would have paid? or is this dead money? Can i only claim the new LMI?
Please help

 

If the property was an invesment then the first lot of LMI will be deductible over 5 years. If you exit the loan any remaining LMI you haven't claimed would be deductible in the year the loan was exited.

New LMI would be payable again if you change lenders and borrow over 80% and this would be deductible over 5 years.

See my last 3 tax tips for info on deductibility of LMI

 

@Terry_w Is there a cap at what LMI can be claimed?
Currently it is a vacant block, Im planning on buiding three houses on the block. But lender now won't lend until the blocks are completely subdivided. Whereas others will lend to build three houses on the one title.
To obtain this i have to change lenders but was scared i will lose out my LMI. Would i still be able to claim the initial LMI?

 

No cap.

But if you are borrowing to invest you have other considerations. Is the expense incurred too soon to the production of income. Don't assume the interest and LMI is deductible.

 

Yeah i wasn't counting on the Interest to be deductible. But would the LMI still be deductible on the land if i was to change lender and then build ?

 

Depends on the situation. interest may be deductible as may LMI.

 

Correct me if I'm wrong mcarthur, but isn't LMI calculated on the borrowings, not the borrowings+deposit?
ie:
LVR|LMI Rate|Deposit|LMI Payable On|LMI
90% 1.919% $ 50,000 $ 450,000 $ 8,635.50
89% 1.919% $ 55,000 $ 445,000 $ 8,539.55
88% 1.388% $ 60,000 $ 440,000 $ 6,107.20
87% 1.388% $ 65,000 $ 435,000 $ 6,037.80
86% 1.146% $ 70,000 $ 430,000 $ 4,927.80
85% 1.146% $ 75,000 $ 425,000 $ 4,870.50

Meaning there would be savings - although not very much - between 90/89, 88/87 and 86/85 LVR's?

 

You're right Art - I was using $500,000 as the loan, but got the payments wrong: at $500,000 for the loan at 90% then the purchase price would be $555,555 and the remainder $55,555 outofpocket.

And truly, the point is more about the statistical "best": most people won't have options to pay $20,000 for example for a slight decrease in LMI. Where it becomes a little more useful is in comparison between LVRs that are close - is another $5,000 cashinhand worth $1,200 extra LMI for example.

...and of course these are only for those lending orgs using this particular LMI table. As usual, talk to your broker who, if they're nice, will throw the numbers through their org's calculators and get real figures.

 

As Azazel says the sweet spot is 88% + LMI capitalised.

Do not let a broker convince you that this is not possible. I am doing this as we speak. It does require more work on behalf of the broker....so enure that you get a broker will put the yard in.

 

Dont forget lmi could also be paid by borrowing on another loan split