Strategy: Avoid LMI where your Servicing is Limited

Strategy: Avoid LMI where your Servicing is Limited (and you have the cash)

This is a loan strategy.


It can be a good idea to go for 90% or 88% LVR on loans for investment properties in some situations. This can help preserve a person’s cash deposits for future properties.


However where the serviceability will run out before the cash then perhaps going for an 80% LVR investment loan may be more appropriate.


This is mainly because the borrower can avoid incurring the cost of LMI unnecessarily. This saving can be substantial. On a recent check I did for a client the LMI on a loan amount of $260,000 at 88% was roughly $3,500.


Example

Mr X has $200,000 cash and a borrowing capacity of $1mil. His plan is to buy 5 properties of $200,000 each by putting down 10% deposit, and 5% for stamp duty and LMI then borrowing the rest at 90% LVR. Let’s say the LMI is $3,000 per loan. He also wants a $50,000 cash buffer left over.


He qualified for 5 loans before, but now that things have tightened up he can only get one more property.


Should he borrow 90% he will have to pay $3000 LMI again. He will need $30,000 deposit, but after he settles he will still have $140,000 cash sitting around. He will put it in the offset account so it won’t be wasting away, but he has incurred $3,000 in LMI needlessly.


A better option for him may have been to go for an 80% loan by putting down 20% deposit. He uses more of his cash, but he saves $3,000 in LMI.


If in the future his serviceability improves and he can qualify for more loans then all is not wasted because he can then borrow against the 2nd property and even take the loan up to 90% at this point. As a bonus there may have been capital growth in the meantime and now the property may be worth much more.


But now that the serviceability has tightened up after buying the first property he can only service for 4 more loans.


If he keeps using 10% deposits he will need to pay LMI on 4 more loans – but he will be left with a lump of cash.


However, it may still be preferable to pay the LMI in some cases. One case is where the person is investing now but intends to buy a main residence in the near future. In situations like this it may be better to keep the cash so as to use it for the main residence. Doing this will result in a lower non-deductible debt and higher tax deductions with the increased interest on the investment loans. LMI would also be deductible over 5 years.

 

Another awesome post!

 

Thanks for the post! Interesting read and lots to learn.