Paying LMI Willingly?

Discussion in 'Investment Strategy' started by Medusa, 2nd Mar, 2020.

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  1. Medusa

    Medusa Well-Known Member

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    Are there instances where choosing to pay LMI positives out way the negatives? Everyone say's avoid it like the plague, but I am at a point where it's starting to make more sense to me in my investment accumulating phase and that's got me worried - hence this post. Am I on the right track or completely wrong?

    My portfolio: I have my PPOR, 1 IP and in the process of purchasing 2nd IP. Cash flow serviceability is a major problem to buying more properties so I'm looking to acquire cheaper cash flow positive properties in order boost my borrowing capacity to continue my accumulating phase. I have around 200K in equity and 170K cash in offset account of PPOR. Am I crazy to pay LMI when after house deposit I will easily have over 100K in offset account? I am getting a hefty pay rise next month which will help with borrowing serviceability going forward.

    Positives: Extra savings in offset acc of PPOR
    - More deposit for next IP and other future investments (shares)
    - Slight increase in tax deductible of IP interest
    - LMI is tax deductible over 5 years - not sure how much you can claim yet I've read 20% per year for 5 years so does that mean in 5 years it is 100% reclaimable in tax?
    - More 'good debt' then 'bad debt'
    - Less equity on paper but more cash on hand

    Negatives: It's expensive!
    - Paying 20% deposit results in better yields
    - Instantly more equity
    - It's the banks insurance policy, not mine
    - Does it make sense to pay LMI when I have cash on hand to avoid it?
    - Less cash on hand in offset means paying more interest in my PPOR
     
  2. Terry_w

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

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  3. Medusa

    Medusa Well-Known Member

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    Hi Terry, thanks for your response. I am still new to property investing so no I did not know about debt recycling. I've since done a bit of research and it sounds very exciting/interesting, just not sure it's fits my current situation.

    My partner and I have a joint income of 140K (I've read this strategy is best suited to higher income earners. Also had a quick chat online with CBA and they said equity loans are 'Value of property MULTIPLY .80 MINUS your loan amount' that is your equity withdrawal amount. So turns out I have 17K in PPOR and 16K in investment... hardly enough to purchase another investment property.

    Can I ask what services you offer and how much you charge? I think I am heading in the right direction, but would like some advice on exactly where my portfolio stands (how healthy it is) and what types of properties I should be looking at purchasing in the near future.
     
  4. Terry_w

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

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    At the moment I am concentrating on mortgage broking and am only offering advice to our broker clients - don't charge anything for clients of my company.
     
  5. croseks

    croseks Well-Known Member

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    There are positives to LMI but you really have to work out if it will help in your situation. If you have good serviceability (hefty payrise) then it could work in your favour.

    For example:
    If you buy $400k house with 20% deposit, your upfront cost is $80k

    $400k house with 10% deposit and LMI, your upfront cost is $47k (using this calc LMI premium estimator - Genworth)

    That could be the difference in getting 2 x $400k houses. You still need to be able to service these new loans, so really it depends on your situation. I can definitely see a case for LMI, but if you don't use it to your advantage and its only so you pay less up front to have a better lifestyle, then no you are better off going 20%.
     
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  6. Jess Peletier

    Jess Peletier Mortgages, Finance & Property Strategy Aust Wide Business Member

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    This needs to be discussed in the context of your whole strategy. You have heaps of resources available, but your borrowing capacity needs to be considered as well.

    An LMI strategy is usually used to maximise how far your deposit funds can stretch, but if you're limited in borrowing capacity it might be a waste of money b/c you'll have lots of remaining deposit funds, but can't borrow to make the most of them.

    FYI - cash-flow properties usually don't increase borrowing capacity, so speak with a good broker about your plans before you jump in.
     
  7. Medusa

    Medusa Well-Known Member

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    My strategy is to grow as much wealth through property by accumulating as many assets as I possibly can. As long as the math works in my favour I don't want to stop.

    Can you explain what you meant by cash flow properties usually don't increase borrowing capacity? My broker literally just told me 2 weeks ago if I increase the rent on my investment property by 20$ per week it has a big difference to how much my serviceability will be hence borrowing becomes easier.

    I am currently looking at a property for just under 300K with estimated positive cash flow of $90 per week for principal and interest, or $170 Interest Only. Do you think this is not a wise investment? I'm legit looking to buy it JUST for cash flow as I know it's not in a growth region, but it is 2min walk to train line and only 30mins from a capital CBD so I doubt it will decrease in value - my main reasoning is buying for cash flow :/
     
  8. Terry_w

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

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    cash flow positive does not mean good investment. My view is you shouldn't be buying property for just cash flow, there needs to be potential gains in there too or there is no point.

    $20 week extra rent is about $1,000 per year extra income. Extra income is good and it helps borrowing cap, but probably not as much as you hope - maybe $6,000 in extra borrowing cap.

    Not much, but I guess if you had 10 properties and increased the rent by $20 on each it will help a bit.
     
  9. Medusa

    Medusa Well-Known Member

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    Yes I agree but only if my income allows to service more growth assets. Sorry let me make it a little more clear regarding my strategy. I've been told by 2 brokers recently that I will reach my borrowing capacity with my next investment and most likely have to wait for 2 years (because my income is low) of savings before purchasing again.

    I don't ever want to reach that threshold of 'do nothing but pay down debt and save' alas I think my next 2 assets should be high yielding assets, then in only a year 1.5yrs I can buy more growth leaning assets. Does that all make a bit more sense?
     
  10. Terry_w

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

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    It makes sense, but it is impractical because you will hit that limit - it is inevitable.

    A different approach might be to go for high growth assets and sell every 7 years or so, re-use the borrowing cap, pay off debt and slowly get ahead that way.
     
  11. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    for most peops 20 bucks a week rent is worth approx 5 to 10 k extra borrow cap

    so I guess if the current borrow cap is 50 k, 20 a week adds 20 %

    ta
    rolf
     
  12. Beano

    Beano Well-Known Member

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    Paying 20% deposit results in better yields

    The yield of a property is unaffected by the deposit.
     
  13. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    this is the case if the deposit is cash savings

    Most portolio builders use equity loans, so usually the effective LVR is 105 % approx

    ta
    rolf