LMI: Friend or Foe?

Discussion in 'Loans & Mortgage Brokers' started by Corey Batt, 16th Nov, 2015.

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  1. Art Vandelay

    Art Vandelay Well-Known Member

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    Our most recent purchase financed with CBA incurred a "low deposit premium" as opposed to LMI. As I understand it, this is a premium that the bank pockets for the pleasure of doing business with us at 90% LVR, when we're not considered high risk enough to warrant the bank insuring our laon with Genworth/QBE etc.
    I hadn't confirmed but was assuming that this low deposit premium would still be tax deductible in the same way LMI would be over 5 years?
     
  2. Corey Batt

    Corey Batt Well-Known Member

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    Each have their own specific requirements, membership req's, incomes etc.

    As per the question on 80% LVR's vs LMI territory with 700k+, this is largely dependent on 'how big' you intend to get with your investment portfolio. For example if you have an estimated 800k, that alone will likely allow you to grow a portfolio of ~3.2mil. Considering you would likely be expecting growth during that time on the portfolio, using LMI may be an unnecessary cost.
     
  3. ZachAnsel

    ZachAnsel Well-Known Member

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    For me, the best thing in life are free. The second best one is LMI
     
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  4. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    My uni tutors always gave me a hard time when using descriptive terms which can be mis-interpreted

    So rugby players. tennis pros and golfers are obviously excluded

    Slow day :) you can see im bored

    ta
    rolf
     
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  5. Johann_

    Johann_ Well-Known Member

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    Thats why i make sure I have more funds to create a further buffer as well :)...
     
  6. Johann_

    Johann_ Well-Known Member

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    Hi Rolf,

    I am pretty conservative lol...
     
  7. Steven Ryan

    Steven Ryan Well-Known Member

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    Great post.

    Takes a while to get your head around the benefits of utilising LMI and the opportunity cost of not but I think I can sum it up with this extremely accurate representation:

    in_short.gif
     
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  8. Terry_w

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

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    I was just talking to someone who purchased in Sydney near the airport in the mid 1970s. She paid about $13,000. She has just had an offer for $3mil.

    Imagine if she had paid LMI. Totally insignificant over the subsequent 40 years.

    In fact imagine if the LMI was 100% of the loan amount or if she paid double what the property was worth then - doesn't really matter in the long run.
     
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  9. jsoe000

    jsoe000 Well-Known Member

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    Without LMI, we wouldn't have been able to built the portfolio we have today. 3 properties + 2 granny flats, all positive cash flow. :cool:
     
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  10. bez23

    bez23 Well-Known Member

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    Utilised LMI for most of my IP purchase. Regretted going 95% though for 3 of them. Could've bought 1 less property and give myself room to refinance later on.
     
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    time and/or non organic growth may fix that

    ta
    rolf
     
  12. Andrew H

    Andrew H Well-Known Member

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    Awesome post @Corey Batt !!, was really interested in researching this topic tonight in terms of building the portfolio. Who needs Google when we have u guys ;;)) much appreciated
     
  13. pommy

    pommy Well-Known Member

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    @Corey Batt, thanks for this excellent explanation. I now understand a lot of other threads talking about LMI and the sweet spot. This is totally counter-intuitive to me as I always thought of LMI as something to avoid. But really it is something to choose or not choose like many other things.

    Here is a made up example I would like to walk though, where the LMI is used to increase buffer instead of exposure.

    500k PPOR, 250k Mortgage

    At 80% LVR can obtain 150k from PPOR
    Invest in property as 20% deposit and this would buy a 750k property.
    No buffer.

    At 88% LVR can obtain 190k from PPOR.
    Invest $90k in same $750k as 12% deposit. This leaves $100k for LOC.

    Buffer = $100k borrowed - $5755 for PPOR LMI - $8632 for IP LMI (correct?) = approx $85k

    So about $15k (-TAX) buys you $85k worth of buffer.

    I am quite new to this, so bear with me! Does this add up or did I make a mistake?
     
  14. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    A common life challenge where "we dont know what we dont know", yet w attempt to navigate life around that concept and are surprised when stuff doesnt work the way it does for some others.

    A business mentor of mine says " its simple, but not obvious"

    ta
    rolf
     
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  15. pommy

    pommy Well-Known Member

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    @Rolf Latham ... you are right, very true. That is why I am glad I am reading this stuff before my first IP.

    I am also wondering ... I did a quick spreadsheet that shows I can almost double what I invest in property by going from 80% to 88% taking all the LMI into account. BUT... the amount borrowed would probably (need to check with broker) be too much with regards to serviceability. So the question is would I be better to stick to 80% for now, save the LMI, but use it later when (if) we are earning more money.
     
  16. Steven Ryan

    Steven Ryan Well-Known Member

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    @pommy...check with your broker so you know.

    However, some food for thought, regardless of what your borrowing capacity is:
    • If you borrow 88% you will have more cash left over for a safety net/buffer/value adding/for your next deposit
    It might make sense to borrow 80% to begin with especially if you're planning to add value. If you will have plenty leftover anyway (for a buffer) and will definitely have higher income in the future, enabling you to refinance to a different lender in a couple of years and go to 85% (if there are no inhibitory changes to lending policy) it might work. You can get valuations from a few lenders down the track and refinance to the one with the highest valuation based on their maximum LVR for refinances (and your borrowing capacity at the time).

    There are a few ifs in there, not all of which you control.
     
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  17. Corey Batt

    Corey Batt Well-Known Member

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    You've definitely got the basic concepts down - the increased leverage then allows you to maintain the buffer or expand the exposure, giving you a larger base to grow from.

    The other variable in this scenario is dependency on the lenders to follow through with this strategy - ie allowing a cashout up to 90% total, purchases in the LMI range. At this time it's not that difficult to structure this, but always be aware that policy ebbs and flows depending on the market at the time.
     
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  18. Terry_w

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

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    LMI would not be deductible in this situation of borrowing against the main residence. You are borrowing money which doesn't relate to property at the time. See my tax tips on LMI

    The LMI on an investment loan would be deductible though
     
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  19. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Part of the challenge is working out what you can get NOW, and then acting on that.

    As dumb as it sounds, often you are better off doing the 88 % lend now, rather than trying to extract that at a later date.

    but there arent any simple answers to generalised data, youd need to run the numbers against your stated goals and resources and see where you stand and make a call from there

    ta
    rolf
     
    pommy likes this.

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