Loan Tip: How paying LMI can Improve Cash Flow in the Initial 5 Years

I don’t like LMI – it is a waste of money if you can avoid it. But many people can’t avoid it, so to make those people feel better here is an example of How LMI could improve cash flow during the first 5 years – and then worsen it.



Example

Bart is on $100,000 pa. and buys an investment property and incurs $25,000 in LMI. He borrows to pay this.

From a tax point of view Bart can claim $5,000 per year as a borrowing cost – assuming he settles on 1 July, otherwise the first and 6th year would need to be apportioned.

That means Bart gets an extra $5,000 in tax deductions.

His marginal tax rate is 34.5% so this extra deduction actually saves him $1,725 per year for 5 years. $8,625 in total.

Bart borrowed to pay the LMI so he paid nothing upfront to get this extra deduction, but the loan size is $25,000 larger so at 3% interest this would mean $750 per year in extra interest.

So $750 per year in extra interest cost v $1,725 in savings results in a savings of $1,000 almost per year. This will only be for the first 5 years though and then there will be extra interest incurred for the life of the loan – which will be decreasing as the loan balance decreases.



So LMI is not all bad! (until year 5 anyway)