All Topics / Finance / quick query re loan mortgage insurance

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  • Profile photo of carlincarlin
    Participant
    @carlin
    Join Date: 2005
    Post Count: 211

    I think I know the answer to this one, but just in case –

    To avoid paying LMI do you have to come up with 20% of the purchase price or 20% of the total amount you're borrowing (in our case, purchase price + all buying costs such as stamp duty)?

    Our plan is to borrow the 20% deposit from our current lender and then go to another lender for the remaining 80%.

    thanks,
    Carlin

    Profile photo of WJ HookerWJ Hooker
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    @wj-hooker
    Join Date: 2007
    Post Count: 272

    carlin,
               As you know the answer is you need 20% deposit or equity on the complete loan.
    Don't think you can get out of LMI by going to seperate lenders, you may be mistaken.

    good luck

    Profile photo of RaymondBDMRaymondBDM
    Member
    @raymondbdm
    Join Date: 2008
    Post Count: 32

    at 80% lvr on a standard product you wouldn't pay LMI. From a lenders point of view at 80%, funds to complete can come from any source..savings, redraw on another loan etc..

    you may need to pay lmi with your current lender on the increase though depending on your exposure…

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    Westpac can lend up to 85% with no LMI in some instances

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Carln

    Other lenders have alternatives to LMI which may prove cheaper and allow you to go to 90%.

    Richard Taylor | Australia's leading private lender

    Profile photo of carlincarlin
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    @carlin
    Join Date: 2005
    Post Count: 211

     Thanks for the responses.

    WJ Hooker – what I'm proposing is not uncommon and is something that's recommended by loan experts (there was a whole API article advocating this approach). We're not just looking at it to avoid LMI but also to avoid further cross-sec –  we've allowed current lender to tie us up in knots.

    We are in a position to easily borrow the deposit required from current lender.

    Profile photo of WJ HookerWJ Hooker
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    @wj-hooker
    Join Date: 2007
    Post Count: 272

    carlin,
               Ok Thanks. Good luck. I suppose if you have some calateral and some deposit you can use different lenders to avoid the LMI or each lender, but I would have thought the lenders would want to know where all the money was coming from and check up and see for themselves? But I haven't read the API article, so maybe I should.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,213

    WJ

    Perfectly acceptable to take the deposit from your LOC.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Carlin,

    I did this and it was sweeettt………  Was buying IP worth $950k. Borrowed 80% from Westpac, borrowed 20% as personal loan from Citibank.

    Interest rate on citibank loan was obviously much higher than Westpac. I furiously paid off the citibank loan. Just finished paying citibank off 3 months ago. In total, LMI would have been in the vicinity of $23-$25 k. Instead I paid only 3% (the difference between citibank and Westpac rate) of 20% of 950k.

    Beat the banks at their own game!

    Hope you have the same luck  :)

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of carlincarlin
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    @carlin
    Join Date: 2005
    Post Count: 211

    Hi Cattleya,

    thanks for sharing your experience.

    with your personal loan from Citibank for the deposit, I'm assuming you weren't able to claim tax deductions for the interest you paid?

    If that's the case, then why didn't you take out an interest-only investment loan?

    By the way, the API edition that explained this loan structure was Feb/Mar 2004 (p64 – 'Structuring for the future'). The author was Stuart Wemyss.

    cheers,
    Carlin

    Profile photo of CattleyaCattleya
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    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Carlin,

    I was able to show my accountant that 100% of Citibank loan went into the mortgage as suppose to paying lawyers fees, stamp duty etc. He let me have it as a deduction. He says it doesn't matter what loan you have, as long as the purpose is for investing. If you are "stupid" enough to invest with the more expensive loan…

    The catch is, you must not tell the bank or they won't let you, they'll insist on LMI. It is also about timing:
    For mortgage pre-approval, bank doesn't need proof of 20% money sitting in your acct for 3 months
    The 3 months proof is only required when you already have the property and about to sign the contract.

    So I took the citibank loans when I was still looking. The money was sitting in my saving acct whilst I continued looking for the property. Lucky I found it a few weeks after citibank loans and arrange for contract day to be a few weeks after the 3months citibank date… just to be safe. 

    Because my savings acct was with Westpac, the lender looked into my acct himself and was happy to sign off the final mortgage approval.

    So the key is timing and planning… good luck!

    PS: I hate mortgage insurance because it is for the bank's benefit, not me.
    Purchase price is $950k. If I go bankrupt, the bank sells my house..  say for $890k. The remaining $60k they claim from the insurance company while I get nothing.

    So it benefits them, not me. Honestly, why cough up $23,000 of your hard earned money just to safe their b***??!

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of carlincarlin
    Participant
    @carlin
    Join Date: 2005
    Post Count: 211

    Thanks for clarificatin Cattleya.

    You were very wise to organise the money in advance and have it sitting in your account while you looked for something to buy.

    Our situation is different – our 'timing and planning' has been lacking! We've already signed a contract – cooling off period is delayed so we have a bit of time (not much) up our sleeve.

    Lender A had already told us we could borrow $200,000 – we have lots of equity (65% LVR) and good serviceability. So hoping that our request for $40,000 (property is $180,000) isn't going to be an issue. We had to tell them it's for investment property purchase as it's one of the available boxes to tick on the form – so they must have a fair idea of what we're doing.

    Still waiting to hear if Lender B will come back with the remaining 80% of the loan. So we're in a bit of limbo at present.

    I agree – LMI is to be avoided!

    cheers,
    Carlin

    Profile photo of CattleyaCattleya
    Participant
    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Carlin,

    Don't really understand your position: so you're saying your equity in your existing PI or PPOR is 65% and you are buying another PI of $180k. Probs is, the lender may slap you with LMI?

    I'm not sure whether you think the hassle associated with getting a PL is worth it. I'm sure you're also very good in money matters.

    Given your time frame and the fact that your mortgage lender already logged their search with Veda Advantage, it'll be trickier to get a PL… this is because your PL lender will know that you've been shopping around for a mortgage. And if they're diligent, they'll contact your mortgage lender. Which means your serviceability in the eyes of PL lender will be diminished. 

    But should you decide to do a PL… let me introduce you to another potential hazard  :)  sorry, don't mean to scare you away.
    If you decided to get the PL, make sure the mortgage lender doesn't know anything about it. ie. proceed from PL and monthly installments should be hidden away from the mortgage lender.  In my case, the proceed from citibank went into my acct with bendigo bank and I transferred it into my westpac acct. Hence westpac didn't know I had a PL with citibank, otherwise they would have reduced my serviceability.

    Good luck.

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 12,024

    Sorry to but in on the ongoing post but 2 quick points:

    1) Westpac would have seen the PL enquiry on your credit report.

    2) It is an offence not to advise your principal lender that you intend to borrow the funds for deposit. This question in on all application forms and therefore would be deemd as an attempt to obtain a mortgage by fraudulent means.

    No adviseable.

    On a separate note not quiet sure why you would pay off a investment loan as quickly as possibly especially if the interest rate was only slightly higher than the principal mortgage rate.

    Richard Taylor | Australia's leading private lender

    Profile photo of carlincarlin
    Participant
    @carlin
    Join Date: 2005
    Post Count: 211

    Hi Cattleya,

    Lenders (banks or otherwise) can easily track what you're doing, no matter what paths you send your money on. We're being upfront with what we're wanting to do here, with both lender A and lender B. We could stay with lender A and we know we can borrow sufficient funds, but we are trying to get the bulk of the loan from lender B because lender A has us tied up in excessive cross securisation.

    Also, we are uncomfortable having all our loans with the one lender.

    BTW, if we DID borrow with lender A we would not have to pay LMI, due to adequate equity in current PPOR and IPs and solid evidence of serviceability. 

    cheers,
    Carlin

    Profile photo of CattleyaCattleya
    Participant
    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Richard,

    Thanx for the input.

    Westpac may have seen PL inquiry at Veda but inquiry is just inquiry, not necessarily materialise into a loan. If they had followed up with Citibank they would have known about the PL. So it was a calculated risk.

    I paid off the PL as quickly as possible because I want to get down to 80% asap. Besides, I like to have my finances nice and simple. Having a PL loan was an additional chore to keep up with. So paid it off furiously and now I'm back with only IP mortgages.

    Still paying off furiously… all my mortgages are principal and interest payments. I know paying off principal is one of the mortal sins of investing… but hey, why not.

    Many thanx.

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,213

    Cattleya

    In that case, Why not just have IO and pay the loan down as a PI and then you could use the redraw (or even better, just use a offset account) for the deposit on the next property – will save you borrowing as a personal loan (and deceiving the bank by not telling them), it will save you interest and fees and be more tax effective.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of MortgagePlusMortgagePlus
    Member
    @mortgageplus
    Join Date: 2008
    Post Count: 83

    Wow. This thread got way too complicated for such a simple question.

    Carlin, if you would like some good advice, don't listen to anything that Cattleya said. It pretty much all adds up to crap, and illegal activity.

    There is no calculated risk in lying to the bank (and by the way, non-declaration of current liabilities IS absolutely fraud and is against the law)
    Having 'all your loans on p+i is also not ideal, and further reinforces why noone should listen to you.

    All Carlin wanted to know was is borrowing up to 80% on your current property (equity release) and using those funde to place a deposit for another purchase for 80% is a good way to avoid LMI.
    The answer is yes. That is a standard and intelligent way to finance the purchase. And avoid LMI if all the figures stack up. The other point to consider is that you must ensure you correctly disclose the limit and balance of your current loan when applying for the new loan of 80%. Also ensure the increase loan to your existing property is set up as a seperate split to keep your accounting simple.

    I hope this helps answer what is ultimately a simple question.

    Have a great day.

    Profile photo of CattleyaCattleya
    Participant
    @cattleya
    Join Date: 2008
    Post Count: 121

    Hi Terry,

    Yes I could do that, unfortunately my equity was not enough to cover the 20% deposit + expenses. So I had to borrow the rest. But I'm back below 80% now…  phew….

    Hi Tim,

    Thanx for calling me crap. I know I was 'creative' but I challenge your claim that it was illegal. There is no law saying that you have to disclose everything to the bank. There is only a statement in mortgage application form saying you have disclosed everything. And because you sign this, it becomes legally binding.

    Now, before you jump on me… this application forms are drafted by the banks. THEY established all the rules and we are forced to abide by it. Anyway… good citizenship says you should play by the rules. But I'm not willing to give up $23000 for nothing… and for the greedy banks too.

    I can understand why it is in your best interest to scare the public into succumbing to the Bank's rules because that's how you earn your living.

    sing with me will you…

    Regrets, Ive had a few;
    But then again, too few to mention.
    I did what I had to do
    And saw it through without exemption.

    I planned each charted course;
    Each careful step along the byway,
    But more, much more than this,
    I did it my way.

    Yes, there were times, Im sure you knew
    When I bit off more than I could chew.
    But through it all, when there was doubt,
    I ate it up and spit it out.
    I faced it all and I stood tall;
    And did it my way.

    Cattleya

    Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.

    Profile photo of MortgagePlusMortgagePlus
    Member
    @mortgageplus
    Join Date: 2008
    Post Count: 83

    There is nothing wrong with telling the bank that you have borrowed the additional money. If you wanted to try and get creative, you could just as easily have told them you took out the PL to invest, and declared it on the app form anyway. As long as your income could service all your liabilities, there would have been no problems.
    When you sing a document that says you have declared true information, it becomes binding. When that document relates to an application for finance from an ADI, and you have not been truthful, it is called FRAUD.

    I am not calling you crap. You are just uneducated as to the rules, and the reason the rules exist. It is nothing personal.

    I do not like to jump through hoops any more than the next person. I despise the banks.

    Either way, the real case in pint here is that the original member that posted the question got a range of answers from a range of people and can make a decision based on that.

    Being knowledgable in the industry, I just felt obliged to inform the original poster that your advice to break the law (not to mention possible get someone in a loan they can not service and cause great financial hardship) should not be followed.

    I wish you all the best with your 'strategies' on investing.

    If you would like to take your investing to a more sophisticated (and legal) level, I am sure you wil have plenty of help from the members of this forum.

    I hope you have a great day, and as I said – All the best.

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