It was those three words that saved my property dream

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There are three words that I just love to hear.

One starts with ‘I’ and another with ‘L’. But it’s not ‘I love you’.

Lenders’. Mortgage. Insurance.

They’re the three little words that can dramatically get you started in investing and help you on your way to building a portfolio, especially in a hot market.

It’s not complicated. But unlike Cheryl Cole and Will.i.am’s ‘Three words’ song, lenders’ mortgage insurance does seem to be underrated.

That’s because most people prefer to save a 20 per cent deposit before they buy a property, as it means they won’t have to pay lenders’ mortgage insurance, otherwise known as LMI.

LMI is basically an extra payment you have to pay to the bank if your deposit is less than 20 per cent, in case you default on the loan.

But it doesn’t actually protect you, it’s merely insurance to protect the bank.

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So you’re still up the creek without a paddle, so to speak, if you do happen to default and can’t pay your loan.

Nevertheless, LMI can be seen as an unnecessary cost and a waste of money for some homebuyers and investors.

I’ve never been a good saver but I’ve always been pretty good with bills and making repayments on time.

So I see LMI as a fabulous opportunity to buy in a market sooner rather than later.

Around Australia, many markets are now rising – often rising faster than you can save

So for example, it might take 10 months to save a $30,000 deposit but when property booms, values can easily rise by that much in the same period of time.

That’s why I personally feel it’s always better to buy as soon as you can and pay LMI when you have to. I’m no accountant or financial expert but, like all API readers, I love property and the benefits it provides.

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Another beautiful thing about LMI is that you can actually claim this as a tax deduction and with the end of the financial year just around the corner, you wouldn’t have to wait for too long to claim it back. Awesome!

LMI has also been great in my own investing journey. A couple of years ago my husband and I had to pay a pretty big LMI fee – I think it was about $15,000. But this allowed us to buy a property at $621,500, which had a bank valuation of $700,000 at the time.

So by forking out the extra $15,000 and bringing the purchase price up to $637,500, we instantly made about $65,000 in equity.

At the moment, we can refinance and we’ll have about $100,000 to use as a deposit (is that not the most exciting thing when you have money to spend! It’s a bit like being given a credit card and told you can go shopping at Myer.)

Once again, I’m predicting we can use this as a 10 per cent deposit on something and pay LMI again. See what I mean – it just allows you to buy better property, and much faster.

It means another property wouldn’t necessarily be limited to a purchase price of $500,000 (using $100,000 as a 20 per cent deposit).

Yep this truly is a girl’s best friend, only this time it’s good debt! Unlike those shoes at Myer!

Mortgage insurance

Brisbane seems to be picking up the pace pretty quickly and I don’t see the point saving for another 12 months when the market might gain, say, four or five per cent over the next year.

Even with that conservative estimate and a property priced at $500,000, that would be an equity gain of $25,000 in one year.

You can soon figure out LMI might help you from missing out and it’s all about opportunity cost – getting in when the market is rising, sitting tight when it stabilises.

So with that idea in mind, where are you planning to buy next?

And do you think LMI is worth it?

We’d love to hear your thoughts!



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Lauren Day

About

Lauren Day is the former deputy editor of Australian Property Investor Magazine and an avid property investor. Visit www.apimagazine.com.au


'It was those three words that saved my property dream' have 6 comments

  1. June 28, 2014 @ 9:50 pm David

    Hi Lauren,
    I am trying to make the numbers stack up with this whole property thing! In your example you mention a $500,000 property increasing by $25,000 a year and thus it is more than the cost of LMI (around $15,000 I gather. But what about the interest on your say $450,000 loan, this would be about $23,000, so all up it is costing maybe $38,000 a year and only increasing in value at $25,000. To my mind this looks like you have reduced net wealth by $13,000 a year. I guess the $38K outgoings would be negatively geared, so net the outgoings might be still around $22K, so really it just breaking even not taking in to account all the regular outgoings. Am I missing something? I am just getting started in property investment but finding it hard to get the numbers to stack up. Good to have your thoughts, David

    Reply

    • Lauren

      July 1, 2014 @ 3:01 pm Lauren

      Hey David,
      Bear in mind you would be getting either A) rent from the property or B) you’d be living there yourself, saving you from paying rent elsewhere (although obviously you’d have a mortgage.) So if it rented for say, $450 per week, you would then be getting about $400 per week in rent (I’m taking out property management fees of $50.. ) That’s before your deductions (depreciation)… So $400×52= $20,800..
      Alternatively you might live there yourself which of course means it costs money to live there.. But I would much rather that, than pay rent elsewhere and miss out on gains.. I’m not saying LMI is great for everyone, every time, but I do think it helps to get a foot in the door and you can leverage from that..

      Reply

      • July 3, 2014 @ 8:53 pm David

        Hi Lauren,
        Thank you for the reply. Just finished Michael’s Rules of Property book and it is making more sense. So in summary what I see is the operating cash flow may break even or even be negative, but the capital growth outweighs this. Does this pretty much some it up? Thanks very much, really appreciate the insights to getting started. David

        Reply

  2. July 19, 2014 @ 7:55 pm Jo

    Hi David,
    I have just bought an investment property for what I feel is a bargin and I know I have bought it for 30k below market price. So I bought it knowing it was at a good price, good property and the strong probability of buying it with instant 30k equity.
    So once the property was in my name asked the bank to do a valuation and they said they wouldn’t and that they will always use the sale price as what the property is worth. I am quiet frustrated seeings as I asked the bank all the right questions about getting a valuation on the property before I bought it and they said yes. Do you have any suggestions please David?
    Regards,
    Jo

    Reply

    • March 22, 2015 @ 10:03 am Mark

      A sworn valuation would give you a value on the property most banks would accept for lending purposes. Mine cost me $1200 and a local realestate agent helped me source the qualified valuer to do the valuation for me.

      Reply

      • March 22, 2015 @ 10:07 am Mark

        Dont forget to approach other banks with the sworn valuation if your exiting bank doesnt accept it. In this lending climate banks are falling over themselves to win your business. Hope this helps. Mark

        Reply


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