Paying LMI to 'save time' - worth the risk?

Discussion in 'Investment Strategy' started by spamal, 26th Jun, 2021.

Join Australia's most dynamic and respected property investment community
Tags:
?

What would you do?

  1. Take the risk - Go LVR 88%, pay LMI to invest earlier.

    72.7%
  2. Play it safe - Go LVR 80%, and spend 2 years saving up

    27.3%
  1. spamal

    spamal Member

    Joined:
    14th May, 2020
    Posts:
    8
    Location:
    Sydney
    Hi all,

    I'm planning to buy a PPOR (house in Sydney) the next couple of months and have enough deposit saved up for the 80% LVR, including stamp duty etc. However, if I do that then it will practically clean me out with very little buffer remaining. This is my first property that is intended as a stepping stone.

    I would like to buy my first IP in Sydney to begin my accumulation, and I believe it is generally better to get in sooner than later, given all the infrastructure plans in the next 20-30 years.

    I've compared the 88% LVR vs 80% LVR scenario, and basically, it'd take me 2 years to save up that 8% difference.

    I'm thinking it would be worth it in the long run if I bite the bullet, pay the LMI, so I can buy my first IP earlier (also by paying 88% LVR).

    Obviously this is a riskier strategy but I think the potential benefits will outweigh the costs and risks.

    Has anyone else also been in a similar situation before? Are there any blind spots I haven't considered?

    Many thanks for your advice.
     
  2. spludgey

    spludgey Well-Known Member

    Joined:
    18th Jun, 2015
    Posts:
    3,483
    Location:
    Sydney
    I can give you any advice on what to do, but I paid LMI and got 95% LVR loans for my first 4 IPs.
    There's an upside and downside to everything. The upside is that it allowed me to go much faster than I would have been able to do otherwise. The downside is that two of the properties went backwards and I'm still in negative equity for them a decade later.

    Do I regret doing it? No, absolutely not! (Though IP #3 & #4 were clearly a mistake, but you live and learn.)
     
    spoon and John_BridgeToBricks like this.
  3. David R Sutantyo

    David R Sutantyo Well-Known Member

    Joined:
    2nd Jan, 2020
    Posts:
    65
    Location:
    Sydney
    If you're taking out higher LVR loan, the one taking on more risk is the lender, not the borrower - that's why LMI applies. You're practically getting into the market with little to no money down. It's way riskier to try and gather every dollar you can and leave yourself with no safety net just to make deposit.
     
  4. db9

    db9 Well-Known Member

    Joined:
    25th Jun, 2016
    Posts:
    254
    Location:
    SEQ
    This, 100%!

    Once cash flow and cash buffers are sorted then relentlessly chase the best asset for your needs. Good asset selection will further reduce your risk.
     
  5. Tony3008

    Tony3008 Well-Known Member

    Joined:
    20th Jun, 2015
    Posts:
    972
    Location:
    Docklands, Victoria
    If you default, the lender is protected in that they can claim any loss on the LMI policy. But isn't it then the case that the insurer will come after you for any assets you may have? Asked out of total ignorance.
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

    Joined:
    14th Jun, 2015
    Posts:
    10,599
    Location:
    Gold Coast (Australia Wide)
    I recall a risk manager at a major lender saying the highest arrears rate is around the 80 lvr.......... and I can see why, you are asking the common sense questions. Many credit advisers would say save save save the LMI.....not me.

    Risk transfer in the way of LMI means 5 to 8 % of the purchase price held back for a one off premium.......makes good financial sense to me.

    ta

    rolf
     
    bythebay and John_BridgeToBricks like this.
  7. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    6,675
    Location:
    Mt Druuiitt
    Me, personally I'd take the risk.

    And to quote Rudyard Kipling:

    "If you can make one heap of all your winnings
    And risk it on one turn of pitch-and-toss,
    And lose, and start again at your beginnings
    And never breathe a word about your loss...Yours is the Earth and everything that’s in it!"


    Yes, we studied Kipling at the Druitt High lol.
     
  8. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    Do you have to go 88%. What about 85%. Drops in LVR lowers the percentage of LMI premium

    LMI on the main residence is not deductible - generally, but if you debt recycle quickly some of it could be.

    Other options might be to borrow from someone else to get the LVR to 80% or to arrange a related party loan just in case you need it and then borrow 80% from the bank.
     
  9. Trainee

    Trainee Well-Known Member

    Joined:
    24th May, 2017
    Posts:
    10,257
    Location:
    Australia
    Dont understand why its riskier for you to take the higher lvr. Sure lmi is an additional cost, but its not a risk. It might be if your savings rate is low. Think of it like this. Would buying property be riskier if stamp duty was increased?

    the other side of this is what happens if sydney prices rise while you are saving?

    a lower lvr loan is not necessarily lower risk for the borrower as you still cant access the equity unless you sell or refinance. So even if you have 20% deposit, theres an argument for taking a higher lvr loan, paying the lmi, and keeping some extra in an offset.
     
  10. spamal

    spamal Member

    Joined:
    14th May, 2020
    Posts:
    8
    Location:
    Sydney
    Of course that's an option. However, even the 3% would drop my cash buffer by a lot and would take me 8-10 months to save that amount. The LMI difference is "only" 5K so not sure it's worth the loss in time.

    I am exploring debt recycling with my broker and it seems doable. However, I'd be effectively recycling a portion of the home loan which now has LMI included. Is that what you mean or is there a different approach specific to the LMI?
     
  11. Terry_w

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

    Joined:
    18th Jun, 2015
    Posts:
    41,670
    Location:
    Australia wide
    Debt recycling is a tax strategy so best to get someone licensed for the tax side and leave the broker to advise on the loan side. If you borrow to invest and LMI is incurred it may be deductible..
     
  12. Beano

    Beano Well-Known Member

    Joined:
    7th Apr, 2016
    Posts:
    3,346
    Location:
    Brisbane
    Was Rudyard Kipling a large and successful property investor ?
    I not as old as you so was not around when he started investing :p
     
    datto likes this.
  13. datto

    datto Well-Known Member

    Joined:
    23rd Jun, 2015
    Posts:
    6,675
    Location:
    Mt Druuiitt
    No, well, there was a dealer in the Druitt who went by the name "Kippo". "Hey, Kippo can I score a quarter on tick again?"

    Don't think its the same one.
     
  14. Tony Xia

    Tony Xia Structured Loan Advisor Business Member

    Joined:
    23rd Aug, 2015
    Posts:
    1,546
    Location:
    Bella Vista
    Lmi is definitely not a bad thing, see it as an opportunity to get into the market early. If your borrowing capacity allows you to buy 2 or 3 with paying LMi then its definitely an option.

    As you mentioned, it takes you around 2 years to save around 8%. The market in Sydney probably moved that much between Feb to May, thus paying up to 2% LMI netted you 6% in weatlh within those months.
     
    Tom87 likes this.
  15. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

    Joined:
    18th Jun, 2015
    Posts:
    6,673
    Location:
    Perth WA + Buderim Qld
    Using LMI to get back in the market sooner is a very valid strategy, and one I'd highly recommend over having zero buffer.
     
    John_BridgeToBricks likes this.
  16. Colin Rice

    Colin Rice Mortgage Broker Business Member

    Joined:
    9th Jul, 2015
    Posts:
    3,183
    Location:
    Perth
    If you are playing in a rising market place then an LMI premium will be swallowed up in a short time of growth.

    Also, personally, I would prefer to pay some LMI even if I have the 20% deposit and keep the 8-10% as a buffer in offset, especially if a property investor in order to mitigate any future risks and issues.
     
    John_BridgeToBricks likes this.
  17. John_BridgeToBricks

    John_BridgeToBricks Buyer's Agent Business Member

    Joined:
    25th May, 2018
    Posts:
    2,407
    Location:
    Sydney
    Some great comments above. I agree - pay the LMI and get started on your journey. It is very difficult to save yourself into the property market, so LMI is a way to expedite the process.

    For what it's worth, I paid LMI to get started, as so many of the large investors have done as well. Have your own buffers in place and do your own diligence based on your own circumstances. However if LMI is the only barrier in place, go for it.
     
  18. spoon

    spoon Well-Known Member

    Joined:
    17th Nov, 2016
    Posts:
    1,762
    Location:
    Time-dependent
    The rising market will eliminate your "risk" sooner than you think. Plus taking LMI is not a risk. It's a privilege to get in the market early. There are other places (not in Australia) only allow 50% LVR. That's a risk, because while you are saving for the deposit, the market has left you behind. ;)
     
  19. bythebay

    bythebay Well-Known Member

    Joined:
    22nd Jun, 2015
    Posts:
    292
    Location:
    By the bay
    Agree with many others I would always take the risk
    Generally speaking I want maximum leverage as early as possible - time in market
    I personally think LMI is a fantastic option for appreciating properties in Sydney
     
    John_BridgeToBricks likes this.
  20. Steve90

    Steve90 Active Member

    Joined:
    10th Sep, 2017
    Posts:
    28
    Location:
    Melbourne
    Well would you rather potentially.miss out on potential massive gains? Or play it safe and avoid an extra 20k or so on lmi. Loosing 20k won't change your life, missing a property before it booms might.
     

Price Accounting are a leading tax service for your property + tax issues. Contact Paul@PFI for property focussed tax services using our client portal access, digital signing and checklist based approach for best pricing. Free client pack included.