Lender’s Mortgage Insurance is an investment in itself!
Lender’s Mortgage Insurance is a one-off fee that a borrower must pay if you are borrowing 80% or more of the purchase cost of a property. This fee is payable on settlement and some lenders will allow you to add this onto your loan. This means that you will pay for this within your monthly repayments. This fee varies depending upon the loan balance as well as the percentage of funds you are ultimately borrowing.
Financial Institutions require the borrower to pay this fee in the event you don’t meet your minimum repayments and they are forced to sell the property. This mitigates the risk for the financial institution in the event they have to sell the property for less than the loan amount.
Many individuals will avoid paying this fee when borrowing funds as this is an added expense however avoiding paying this fee can be holding them back. It can be holding them back by not getting into the market sooner missing out on equity and paying more for the purchase price as well as holding them back leveraging into a larger asset base.
Saving the 20% and then purchasing
Let’s say that you are wanting to purchase a property for $500,000 and you are aiming to save a 20% deposit being $100,000 and you currently have $50,000 savings. How long will it take you to save $50,000? If you can save $500 a week you will save an additional $50,000 in just less than 2 years. Now, if you are purchasing in an area that is primed for growth, the $500,000 property could potentially achieve growth of 10-20% in that time. The same property would then be more expensive by the time you’ve saved the additional funds. Suddenly, the $500,000 purchase is now $550,000. You would have to pay $50,000 more and would have missed out on the $50,000 worth of growth/equity. If you had initially paid the lenders mortgage insurance, and let’s assume an LMI amount of $10,000 for this scenario, yes, it would have been an additional upfront cost, however, is an investment if you could have turned that $10,000 (paid in LMI), into $50,000 (growth) by getting into the market sooner.
We must change our mindset to think long term rather than short term.
“I will just buy one property, not two, to avoid lender’s mortgage insurance”
Another big opportunity is when you’re using equity in your owner-occupied home, for example, to purchase another investment property. Let’s say your loan is sitting at 70% loan to valuation ratio, your property is worth $1,000,000 and your loan is sitting at $700,000. Let’s assume that your borrowing capacity isn’t an issue.
It costs money to make money! You must take educated risks to reap the rewards!
Let’s say you access $100,000 of equity to bring your owner-occupied loan to 80%, avoid lenders mortgage insurance and aim to purchase a $500,000 property. You purchase a property primed for growth and it achieves 15% growth in the first year, meaning you’ve made $75,000 of capital gains.
Now let’s say that you accessed $200,000 of equity to purchase two $500,000 investment properties bringing your owner-occupied loan to 90% with lenders mortgage insurance being applied and let’s assume the LMI is $20,000 for the purpose of this scenario. You then purchase two $500,000 properties primed for growth and across the two properties achieve on average 15% growth, meaning in the first year you would achieve $150,000 of capital gains. Considering the LMI cost, you’re still up $130,000. Building wealth is about leveraging to hold the largest asset base possible and allowing time to let those assets grow.
These are two important ways that lender’s mortgage insurance is an investment that you must understand if you want to get your hands on the largest asset base possible. Remember that it costs money to make money. Paying additional purchase costs on the way into the deal can ultimately mean more gains and larger results long term.
If you have any questions on the information discussed in today’s blog, please reach out to us at info@tayloredpropertywealth.com.au and we would love the opportunity to discuss these with you.
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