Pay LMI or not

Discussion in 'Accounting & Tax' started by Ria, 14th Mar, 2018.

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  1. Ria

    Ria Active Member

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    Hello everyone,

    I desperately need some guidance how to proceed with my investment loan. As you can imagine numbers are not my strong suit.

    Scenario 1

    Purchase price: $540,000
    Cosmetic renovation: $15,000
    Savings:$130,000
    Stamp duty and other charges: $30,000
    Deposit available: $100,000 (130,000-30,000)
    Deposit required to avoid LMI: $108,000
    PPOR offset: $50,000
    Should I withdraw $8000 for deposit to avoid LMI, and $15,000 for Reno from the PPOR offset account?

    Scanario 2

    Purchase price: $540,000
    Cosmetic renovation: $15,000
    Savings:$130,000
    Stamp duty and other charges: $30,000
    Deposit available: 85000 (130,000-45000 (stamp duty +Reno)).
    LMI: $4,000

    PPOR is practically paid off. Monthly repayment are $200 something.
    PPOR loan amount: $53,000
    Offset: $50,000

    Which scenario is best suitable in my situation? Is there any pros and cons with each scenario? And which scanario looks better from tax perspective?

    Thank you
     
  2. Simon Moore

    Simon Moore Residential & Commercial Mortgage Broker Business Member

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    I think you may be making some simple errors. It will really depend on your long-term plan.

    Scenario 3

    Borrow the full purchase price + stamp duty + renovation costs ($585,000). The additional funds can be borrowed against your PPOR if you have the equity, or you can simply pay down some of the loan to free up the equity. This would potentially leave you with a larger tax-deductible loan going forward.

    Does that make sense? Do you have a broker that is helping you?
     
    astonma and Brady like this.
  3. D.T.

    D.T. Specialist Property Manager Business Member

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    Use less of your cash imo, this can serve as buffer for negative cashflow or covering repairs.
     
  4. Ria

    Ria Active Member

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    Thank you Simon for your reply. I'm dealing with the bank directly.

    I will be moving into my IP in 3 years time.
    I only have 50%share in my current PPOR as it's jointly owned with a family member. I don't want any complications with PPOR. That's why I decided not to access funds against PPOR.
     
    Colin Rice likes this.
  5. Colin Rice

    Colin Rice Mortgage Broker Business Member

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    LMI is depreciable over 5 years and any interest is deductible over the life of the loan.

    As @D.T. stated cash is king.
     
  6. Ria

    Ria Active Member

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    Thanks D.T and Colin for your replies,

    Sounds like paying LMI is a way to go. How much do you think I may require in cash in terms of buffer?

    Thank you
     
  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Im lost

    if your ppor is almost paid off, and you have oodles of equity why consider LMI ?

    ta

    arolf
     
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  8. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If numbers arent your strength - a good broker could be your friend.

    Many lenders will add LMI onto a loan limit. Your numbers seem to assume you need to use the loan limit or cash to pay it.
     
  9. Ria

    Ria Active Member

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    Hi Rolf,

    I know it sounds bit confusing. My PPOR loan is a joint loan with a family member (with my retired aunty). Our arrangement is pretty straight forward; we divide all the property expenses into half. I don't want to complicate anything with this loan as our arrangement is working very well for the past 5 years.
     
  10. Ria

    Ria Active Member

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    Hi Paul,

    Thanks for your reply. I think it's too late for involving a broker as I'm doing the settlement in 2 weeks. Bank said that they can add LMI to the loan amount. I am curious to know if there is any benefit avoiding LMI.
     
  11. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Cost.
     
  12. Terry_w

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

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    How much will the LMI be?

    If you withdraw $23,000 from the offset the interest will increase by about $920 per year.
     
  13. Ria

    Ria Active Member

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    Thanks for your reply Terry,
    LMI would be $5,000 if I contribute $110,000 towards the loan (80,000 as a deposit, and $30,000 towards stamp duty). This would be an investment loan.
     
  14. Terry_w

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

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    Are you saying if you can chip in $23,000 you can avoid paying $5,000?
     
  15. Ria

    Ria Active Member

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    Yes. It looks like a terrible idea now?
     
  16. Terry_w

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

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    Think if it another way, if you invested $23k and made $5,000 out of it that would be like getting a return of 21.7%.
     
  17. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    xcellent

    so dont mess that up

    simpy ask the family member to guarantee an equity loan

    no cost to them

    ta

    rolf
     
  18. Paul@PAS

    Paul@PAS Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    If it was borrowed you would also owe the debt. LMI is a cost.
     
  19. Ria

    Ria Active Member

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    Hi Paul,

    If I withdraw $8000 for the deposit (already have $100,000 in savings, need $8000 to avoid LMI), and $20,000 for the Repairs/Reno. Will that be tax deductible?
    Or
    Do you advise to use redraw on PPOR rather than offset?

    Thank you
     
  20. Ria

    Ria Active Member

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    Thanks Rolf,

    I will check with the bank. I wish I found this forum earlier, it would save me all this hassle.