How To Make Lenders Mortgage Insurance Work For You
It’s likely as a property investor that you’ll have to cough up Lenders Mortgage Insurance (LMI) at some point in your journey. Now, I’ll admit my views on LMI are mixed, but despite how I feel I know it’s a crucial aspect of the real estate game we all need to understand.
LMI is a fee calculated as a one-off charge, usually added to your total loan amount, however it can occasionally be paid upfront. You don’t necessarily have to pay it depending on your financial circumstances (more on that below), but many will choose to in order to crack the property market sooner.
The good news is that for investors we can use LMI to our advantage to help double our property portfolio with just one chunk of cash or equity.
But first, what exactly is LMI?
LENDERS MORTGAGE INSURANCE (LMI)
LMI is a policy that protects lenders from the risk of you, the borrower, defaulting on your loan repayments. If the bank is facing a loss because you couldn’t pay off your mortgage, this insurance essentially helps them to recover any money owed to them.
Generally, lenders will only require you to pay for LMI if you are asking to borrow more than 80% of the property’s value or sale price. The perception is that anyone with a deposit over 20% is less likely to default on their loan.
In this way, we can see the benefits that saving up a higher deposit has in the long term because we can avoid paying for LMI. However, those who buy sooner with a smaller deposit have a better opportunity to capitalise on property prices before they rise. This is when knowing when to use LMI and when not to is important for your portfolio.
LMI DURING THE ACQUISITION PHASE
As real estate investors LMI can be a particularly useful tool during the acquisition phase of property.
When you have a limited amount of capital – whether that’s cash or equity that you have access to – you can use LMI to get more leverage out of your money, especially if you’re in a growth phase of your investing cycle.
For example, if you had $100,000 ready to put into real estate you could certainly use that to buy one property at the 80% threshold and avoid paying LMI. However, you could also choose to make that money go further by splitting it between two properties and borrowing at a higher rate.
When we consider that the insurance rate is one to two percent of the total loan, this may be a viable option if you’re happy to take on the added risk. Of course, this has to work with your overall goals and strategy.
WHEN TO AVOID TAKING ON LMI
You need to undertake a thorough financial analysis if you are planning to use LMI to grow your property portfolio. Understand the numbers straight up and do your due diligence to ensure both properties will pay for themselves and get solid returns.
If it looks like they will have a big impact on your expenses without adding to your existing cash flow, then the two-for-one deal might not be the right move this time.
Remember, buy well and never sell – if you can’t go the full distance with a piece of real estate then don’t put yourself in the position to.
DO YOU NEED TO RE-EVALUATE YOUR STRATEGY?
There are a lot of bases to cover when it comes to the game of property investing. Outside of LMI we also have things like stamp duty and mortgage insurance – all of which are adding up to dollars in your pocket.
Regardless, if you’re in a position to grow your portfolio, LMI might be a great tool for you to take advantage of. If you’re unsure of how to move forward or you’re feeling stuck, our free property investing seminar might also be a wonderful tool for you to take advantage of.
Our expert real estate coaches give professional and personable advice to help you navigate the financial maze that is investing. Register now to secure your spot.
By Jason Whitton
Group CEO Positive Real Estate