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Mortgage Insurance

Discussion in 'Real Estate' started by Bob, 2nd Apr, 2006.

  1. Bob

    Bob Well-Known Member

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    I would like to get some feedback on what the forumites views are on Mortgage Insurance. I am in the process of purchasing a IP here in Sydney and wonder whether I should have used 10percent + costs of my own funds instead of the 20percent + costs that is required so that mortgage insurance is not payable. My rationale being that if I put down 10percent I could have kept the other 10percent for a Navra share fund + hit LE to match it, plus the mortgage insurance would have been tax deductible.

    What do you think?

    Bob
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

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    Subject to building in a margin of safety for your cashfow against interest rate rises, as a general principle I think you should use as little of your own money...and thus as much of bank's money... as possible when investing in real estate.


    So I agree with your thinking provided you've stress tested it. That extra 10% could perhaps be another IP? :rolleyes:

    Cheers
    N.
     
  3. Bob

    Bob Well-Known Member

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    I'm with you. Maybe the next one

    Bob
     
  4. Jacque

    Jacque Team InvestEd

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    Hi Bob
    So do share the details of your latest purchase with us! Always like to hear the what where why and how of fellow investor's property choices :)

    I've used LMI in the past, but only when LOC's were tight enough to warrant doing so. Agree with Nige that it maximises your investment dollars, but if you've got plenty in equity for 20% +costs it makes sense to use this instead.
     
  5. D&K

    D&K Well-Known Member

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    Bob,

    Mortgage Insurance depends on your situation. The greatest advantage of RE over shares is the amount of leverage you can obtain, giving you much more growth using Other People's Money .. and shares have other advantages over RE. So 10% deposit + mortgage insurance is the best way to maximise this advantage in many, but not all, cases.

    Depending on your individual numbers, and finance provider, it could work against you in terms of servicability and you could have difficulty getting the loan, or you could be directed to a low-doc higher rate (because of the ability to substantiate enough income). 20% can be seen as more favourable, so you might be able to get one property instead of none. It sounds like you can demonstrate more than 10% + fees, so not a problem in your case. But another problem could be the bank asking that additional funds to be held locked up in an account for security.

    Personaly, we have gone 20% a number of times because of servicability when the bank has calculated risk (as yields weren't great a few years ago). The benefit of putting the money into a fund may help your servicability, but not your argument if the lender doesn't recognise (yet) the fund as a reliable source of income, or discounts the earnings significantly.

    Also remember two things:
    1) mortgage insurance is for the bank's benefit not your's, it covers the costs and any shortfall to them if they can't get their money back through a foreclosure sale. With the market flat I don't know if this has affected the rate or not.
    2) the tax deduction is spread over 5 year, with the first year amount being X/(365*5) where X is the number of days remaining in the FY.

    Cheers, HTH, Dave
     
  6. Bob

    Bob Well-Known Member

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    I am knee deep (actually higher) in Navra stuff - Wholesale fund, property and I have a feeling I will own some grapes pretty soon. I am gearing up towards LOE in the next five years (plus or minus) and have purchased a Mirvac property at Newington which will settle in the next few weeks. The pending property manager has told me that he has a tenant lined up so it is all blue sky. The property was the last one in stage two and was cheaper than comparable properties in that stage, they are new so there is considerable depreciation so I will line up a schedule prior to June 30. Hey, maybe sometime in my life they might extend the M4 into the city and clear up the mess in Parramatta Road. I am a fan of renting versus owning and rent here in the city and would like to purchase another one here in Sydney later this year.

    Thanks D%K, I had a number of three lease options in Queensland that have all been exercised except for one I have in Maryborough which is due to settle May 07. I put down 10percent on those purchasers, utilised mortgage insurance and my accountant deducted them over 3 years due to the contractual arrangement they were under. Anyway, they all settled early and I received a pro-rata payment from the mortgage insurer. Obviously a buy and hold is a different scenario. Thanks for your advice

    Bob
     
  7. Rolf Latham

    Rolf Latham Well-Known Member

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    Hiya

    Go the 95 % + capped LMI if you can get it.

    Its depreciable, it lowers your risk, or increases your leverage., and allows more diversification

    In making this statement I am assuming you can safely afford another IP in terms of cashflow of a similar nature than the one you are buying, or yu are ok investing the left overs in something like Navra.


    ta
    rolf
     
  8. investor

    investor Member

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    I like Newington did everything go through?

    My first IP 6 years ago was with a 5% deposit - didnot capitalise LMI back then. Did reno refinanced at 80% claimed back LMI within 1st year and went shopping with new equity. LMI is an opportunity cost is my thinking.

    Jane
     
  9. Bob

    Bob Well-Known Member

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    Lmi

    Investor,

    Newington settled and tenanted...negotiated with tenant for a long lease.

    Bob
     
  10. Jacque

    Jacque Team InvestEd

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    That's great, Bob! Did you end up getting the rent you were anticipating?
    Also, what are the strata fees like in that complex?