How to use LMI effectively?

Quick question about claiming LMI. Let's say the loan is 88% LVR with capitalized LMI (let's say the LMI is $5000).

Is my understanding correct that interest on LMI can be claimed for the life of the loan and on top of that I can claim 1/5 of paid LMI every year across 5 years (e.g. $1000 per year)?

 

Edit -

Yes you can claim both LMI over 5 years and interest on the loan for LMI for while rented out.

 

Thanks Terry. If the LMI is capitalized is it up to me to decide whether to claim the interest on it for the life of the loan or 1/5 of paid LMI amount every year across 5 years?

 

Sorry Observer - I misread your post before and corrected my answer above.

 

Really? There are a couple of lenders who won't cap LMI, so you just work backwards. How is it more work?

 

Then they should be in the avoid list from my perspective....the more cash you have the better in my eyes....unless you are not in a hurry to buy more.

Horses for courses...this is why a lot of investors never get past 2-3 properties...you need to understand strategically how you are going to get to at least 8 properties if you want replace your income.

 

Agree 100%.

 

Yes...Leo...a classic mistake which I made on my first property where I was determined to put down the 20% to avoid LMI.....never again...though I did I have to put 20% recently just after the APRA changes now back to 88%.

 

@sash: you just revealed part of "national secret".......

 

No not a secret....just need to be strategic.

 

@sash yeah I hear ya buddy. Your spot on. I have spoken to so many people in the past who think LMI is the devil reincarnated. They want to avoid it at all costs, but at the same time they want to aggressively build a portfolio. I agree with what you said above about horses for courses. but I also really think that there are a lot of people who when say they don't want to pay LMI, when you dig deeper to see their goals, risk profile etc, they would actually WANT to pay LMI they just don't understand enough to make the right choice. Personally I see this in investors with quite a few aspects of investing.

I sometimes hear on these forums that there is no right or wrong in property investment and each to their own. Personally, I really do not believe this. There IS right and wrong on many (not all)aspects, and when people say there is no right and wrong,, its just a cop out for not wanting to learn and grow and do better. imo. But your absolutely right with LMI, its a classic mistake many people make.

 

Thanks Terry!

 

Same for me Sash. Did this with my first PPOR. I was determined that I really need to get 20% deposit before I can even consider buying. As Leo correctly pointed out it's because of lack of understanding how it all works. Using LMI has certain benefits especially when the aim is to grow portfolio fast.

 

If you could, it hasn't been the end of the world in the past.
But I guess with the recent changes it can be a bit harder to refinance with LMI.

 

Get it while you can

 

Agree with this.

I think the next thing APRA will look at is IO periods....so while you can ensure you get at least 10yrs preferably 15 years IO with lenders.

Retrospectively...doing this will hurt your serviceability and may need to refinance assuming you can..

 

Yep. Extend loan terms and IO periods as long as possible and also borrow as much as possible as things will only get tighter i think

 

When you say 88% + LMI capitalised. Am I correct in thinking the following?

Example;
Loan = $300,000
LMI = $2,904.00

$300,000 + $2,904.00 = $302,904
12 % of $302,904 = $36,348.48

So If I was going to capitalise the LMI. My loan would therefore be $302,904 so I would require a deposit of $36,348.48?

 

Add the LMI premium last. Not included in deposit calculations.

 

12% is before LMI is added.

Also with LMI you are able to deduct off tax over 5 years. So if you are on the 40% marginal rate it is probably costing you about $1800 to get into the deal. So instead of tipping in 60k you are tipping in only 36k...that leaves another 24k off in the kitty of another deal.