Brad, a registered nurse, bought his first home five years ago. Having a penchant for carpentry, he got quickly into making the run-down timber bungalow a home—and adding significant value to the property.
CASE STUDY Since completing this project, Brad had searched for an apartment suitable for renovation and, this time, to rent out. But, as he is still repaying the mortgage on his home, he knew his current savings wouldn’t be enough for the 20% deposit on this second property. Keen to take advantage of rising house prices and establish his investment portfolio, Brad spoke to his lender who suggested he use Lenders Mortgage Insurance (LMI) provided through Genworth Financial. Thanks to the existing equity he’s built up in his home, and despite him having only a 10% deposit, LMI would allow the bank to approve a higher loan-to-value ratio (LVR) loan on his new purchase. And importantly, Brad noted: “Because I’m buying this one as an investment, my broker explained that the LMI cost is an expense against the property and therefore tax deductible.” Having secured his second loan, Brad purchased a two-bedroom unit close to the city and in need of some rejuvenation. He has already started the improvements which will increase the value of his investment and attract a tenant of good quality. “I was concerned that I wouldn’t get a second loan without a great deal of savings behind me, but after learning about LMI, and its tax deductibility, I should have considered buying an investment property sooner”.
LMI protects the lender if a borrower is unable to meet their mortgage repayments and the property has to be sold for less than the amount owed to the lender
• Traditionally, lenders require borrowers to have at least a 20% deposit, however by using LMI, lenders can offer lower deposit home loans
• As LMI protects lenders from risk of mortgage default, it enables them to lend a higher level of the security value
• LMI is a one-off premium paid up-front but, in most cases, it can be capitalised into the cost of the loan
• Your lender will advise you if your loan requires LMI and will prepare all the necessary documentation. To qualify for LMI, your lender will check that you can meet regular mortgage repayments, and meet relevant credit policy. Your lender is your sole point of contact if you have any questions regarding the LMI cover provided in respect of your loan.
LMI: THE BENEFITS
• Enabled Brad to purchase an investment property, for future income generation, despite having only 10% savings. Given Brad was saving $150 per week this put him in the property game nearly 6 years before he could have saved another $45,000.
• Allowed him to borrow more and purchase an investment in a good location where property values will appreciate
• He could claim the cost of LMI as an expense against the property and receive a tax deduction
• Meant he could take advantage of current property values and start building his investment portfolio.
HOW BRAD CRUNCHED THE NUMBERS
I have a deposit of $45,000*
My income is $85,000p.a.
I’ll use LMI to get a loan for $416,000**
To buy my investment for $450,000
For monthly repayments of $2,233
Including an LMI cost of just $59***
LMI: for about the cost per month of a can of paint
*excludes stamp duty and other costs of purchase
**30-year term, assuming a rate of 5% p.a.
*** monthly, when capitalised
In this case Brad worked with his financial planner and was comfortable that the growth of his property would outweigh the cost of the mortgage insurance.
Feel free to get in touch if you wanted to run some numbers to see how soon you could be getting into your first investment property.