LMI -vs- 20% Deposit

Option 1:
We can borrow 89% and pay LMI of just over $10,000.

OR

Option 2:
We can exhaust almost every last penny of our savings (we will still have about $10k emergency funds) and come up with a 20% deposit.

OR

Option 3:
We can borrow against another property to make up the 20% deposit.

Thoughts?

 

LMI for me. You will get a good piece of it back over five years, interest payed on LMI remains tax deductible over the life of loan and most importantly, taking LMI means you are not exhausting your buffer

 

No.3

 

Option 3, but buy 2x properties with 10% deposits and pay LMI from your cash you have from your option 1.

2 properties is the icing.

pinkboy

 

When saving deposits I like to think of LMI as option 1) Buy now and pay LMI or 2) Wait, save more and potentially pay a higher purchase price. Especially in a rising market.

 

It depends on your goals and your servicing. It's not a one size thing

If servicing is fine, and lots of IP's is the goal, use equity, use small deposits and pay LMI.

If servicing is tight, you may not be able to use the equity at all. Just depends what you've got going on and are hoping to do long term.

 

Avoid any cash where possible. Avoid LMI also where possible - this will depend on equity and access to other parties.

 

Serviceability is maxed out. This will be the last purchase for a while.

 

Lots of IP's is the goal but this purchase will finish us off for quite a while. Going through Liberty for this loan, after a year or so we may be able to purchase under $200k with a good yield but we will have to save like crazy to do it.

 

If you have a PPOR, and also have cash, a debt recycling strategy could work - pay your cash onto your PPOR, split and redraw for the IP purchase. Less non deductible on your home, and 100% lend on IP.

Win!

Check with your broker (if they understand the strategy) to make sure your lender is cool with it.

 

So option 3?

 

It's a balance of future serviceability and available equity. If you're not going to be buying for a few years and you've got a healthy amount of equity in other properties, paying LMI for the final purchase is probably a waste of money. The rates will likely be cheaper as well.

 

We are moving into a PPOR we own in about a year so I was thinking Option 2 or 3 maybe more beneficial long term. The deposit for this IP is coming from that future PPOR.

 

Good point! I forgot that if I go down the LMI path the interest rate jumps 0.5%

 

If you're borrowing the deposit, just make sure you have plenty of buffer available for emergencies and if that box is checked, go 80% if servicing is blown. If the buffer is minimal, pay LMI and have your cash easily accessible.

 

Yes.

Or option 4 or 5. Depending how you have structured things you may be able to borrow off each other or other family members.

 

This is exactly why we have been trying to get time to come and see you Terry! This is only the tip of the iceberg in terms of complexity.

 

you might want to read this, it covers a lot of your questions

LMI: Friend or Foe?

 

Thanks Andrew,

We received a quote on LMI at 89% LVR and it's $9,500 - interest rate of 4.99%.

No LMI on 80% LVR - interest rate of 4.5% (Savings us over $2,000 p.a. in interest)

It will be option 2 or 3, we have about a day to decide!

 

Yes.