Interesting post by Nathan Birch on LMI (https://binvested.com.au/lenders-mortgage-insurance-lmi/) he references that if folks can run 20% deposit they're better off doing so and avoiding LMI he quotes one of the reasons that using LMI flags you as being a relatively higher risk borrower and reduces your borrowing ability. How consequential is this, does this purely reduce your borrowing ability with the bank you're using LMI or can other potential future lenders (different banks) see that you've used LMI before and also cut your borrowing ability?
Consequences of LMI in capping borrowing ability
- Thread starter mgs4
- Start date
It stems around different lenders having different limits eg, 1mil or 2mil or a # of properties. Different LMI providers also have some limits and some banks share LMI providers (since theres only a couple in Australia). On top of that, some lenders can approve LMI themselves without having to run it past an LMI provider.
So... it depends on how aggressively you want to go, and what your serviceability looks like in general.
I'm sure if you shared your plans and circumstances with your mortgage broker they'd map out a plan to place you with the correct lenders and the correct LMI providers in sequence so as to get where you need to go.
So... it depends on how aggressively you want to go, and what your serviceability looks like in general.
I'm sure if you shared your plans and circumstances with your mortgage broker they'd map out a plan to place you with the correct lenders and the correct LMI providers in sequence so as to get where you need to go.
Other banks won't know you've got LMI and even if they did, they don't care...as long as you can pass their own criteria. The only exception is if the lender you are going for now has to refer the loan to an LMI provider that you have exposure with through another lender that did the same thing.
I read Nathans newsletter. Whilst it's essentially correct, it barely scratches the surface.
Many lenders have a "Deferred Underwriting Authority" or DUA. This means that if your application falls under the parameters of that lenders DUA then the lender has the authority to approve the loan without having it reviewed by the mortgage insurer.
A serious property investor doesn't want the application to be reviewed by the mortgage insurer as this bring a whole new level of hurdles to jump over. Essentially if a borrower has a couple of million in existing loans, or they've got a large rental income, it's almost certain that the loan would be declined by the mortgage insurer even though the lender doesn't have an issue with it.
We've often seen cases where the deal gets declined at 90%. The borrower comes up with another 10% cash and it gets approved very easily at 80% by the same lender. Simply because at 80% the mortgage insurer isn't in the assessment process.
This means that if you can continuously make loan applications under a lenders DUA, you'll be able to borrow a lot more money. Unfortunately one of the DUA parameters is how much you've already borrowed with that lender.
As a result, the simple way around this is to use multiple lenders.
The challenge here is, not all lenders have a DUA and not all DUAs are equal. In most cases the people working at the bank don't even know the DUA parameters, nor do most brokers, simply because they don't deal with investors who try to push these boundaries.
One of my clients started by borrowing everything at 95%. Eventually we looked at the options and realized that he'd have to fall back to 90% lends. At this point he's managed to borrow about $4M and I think there's about another $1M that he can borrow before he has to go to 80%. We're also at the point however, that with every purchase he's got a contingency to complete the purchase at 80% LVR.
You can go a long way borrowing 90%, much further than Nathans email suggests, but at some point you run out of options and then have to fall back to 80%. How far you go depends on how well you understand lenders criteria and the DUA criteria, and how skillfully you can navigate through, around and between lenders.
Many lenders have a "Deferred Underwriting Authority" or DUA. This means that if your application falls under the parameters of that lenders DUA then the lender has the authority to approve the loan without having it reviewed by the mortgage insurer.
A serious property investor doesn't want the application to be reviewed by the mortgage insurer as this bring a whole new level of hurdles to jump over. Essentially if a borrower has a couple of million in existing loans, or they've got a large rental income, it's almost certain that the loan would be declined by the mortgage insurer even though the lender doesn't have an issue with it.
We've often seen cases where the deal gets declined at 90%. The borrower comes up with another 10% cash and it gets approved very easily at 80% by the same lender. Simply because at 80% the mortgage insurer isn't in the assessment process.
This means that if you can continuously make loan applications under a lenders DUA, you'll be able to borrow a lot more money. Unfortunately one of the DUA parameters is how much you've already borrowed with that lender.
As a result, the simple way around this is to use multiple lenders.
The challenge here is, not all lenders have a DUA and not all DUAs are equal. In most cases the people working at the bank don't even know the DUA parameters, nor do most brokers, simply because they don't deal with investors who try to push these boundaries.
One of my clients started by borrowing everything at 95%. Eventually we looked at the options and realized that he'd have to fall back to 90% lends. At this point he's managed to borrow about $4M and I think there's about another $1M that he can borrow before he has to go to 80%. We're also at the point however, that with every purchase he's got a contingency to complete the purchase at 80% LVR.
You can go a long way borrowing 90%, much further than Nathans email suggests, but at some point you run out of options and then have to fall back to 80%. How far you go depends on how well you understand lenders criteria and the DUA criteria, and how skillfully you can navigate through, around and between lenders.
Thanks for the post, on the fellow racking up $4m debts with 95%/90% LVR you must have to have some serious income to support all that?
LMI doesn't influence the valuation result, the valuer does.
At different LVRs the lenders will use different types of valuations which can influence the outcome, but it can be better or worse.
There is one universal truth. When you've got low LVRs, you've got a larger equity buffer so it's less likely that a bad valuation will stop your plans.
I did think about including that point...
Most people simply don't get to the point that this specific example has. Their income doesn't support that level of borrowing, neither do their rents. Often people don't have the risk tolerance or the drive to get there either.
Most people run out of serviceability long before this point. By the time their income and rents increase enough to overcome this problem, their equity has also likely increased sufficiently that they may not need LMI.
Like I said, Nathan barely scratches the surface on this topic.
I paid 9k LMI on one of my places. I can't refinance that somewhere else cuz then I'd be up for 9K again. I can (and have) top up with the same lender for nix though because they only charge it on the difference. I assume this is what Nathan was referring to.
You should really stop putting him on a pedestal though.
LMI is just a tool, it can work to maximise many peoples borrowings,and thus leverage.
On a really broad brush basis, most borrowers either have more income and serviceability than equity or deposit, these borrowers we term
"Equity bound"
and the best way for these to maximise their resources is intense, early and targetted use of LMI
For others, that have more equity or cash than their serviceability or income can make use of we term them
"serviceability bound"
Generally this group will have trouble benefiting from LMI.
ta
rolf
On a really broad brush basis, most borrowers either have more income and serviceability than equity or deposit, these borrowers we term
"Equity bound"
and the best way for these to maximise their resources is intense, early and targetted use of LMI
For others, that have more equity or cash than their serviceability or income can make use of we term them
"serviceability bound"
Generally this group will have trouble benefiting from LMI.
ta
rolf
Which says a lot about the average member of society earning relatively decent incomes but a general inability to save much of this.
Agreed with what has been posted above by most, LMI is a tool which for most is necessary, but for a small group can be avoided in certain circumstances.
The need to use loans > 80% LVR will be determined on 2 factors, equity they have available and the speed they want to move to achieve their goals.
I have no issues with using LMI for investors up to a point. It is a progressive cost, so the higher the LVR, the more the proportional LMI cost is and while it is tax deductible for an investor over 5 years, it can make the numbers on any one deal unattractive. I provide a client with a net return model comparing different LVR effects, often an LVR to around 85% range is more cost effective after tax to an investor than an 80% LVR.
Peter makes a good point about DUA's, I recently had a clients loan application for a PPOR on Northern Beaches at a 90% LVR accepted by lender but MI declined based on location. Surprise to all of us. Another lender using the same MI accepted under their DUA which was to 90% without having to go to the MI for review.
I have no issues with using LMI for investors up to a point. It is a progressive cost, so the higher the LVR, the more the proportional LMI cost is and while it is tax deductible for an investor over 5 years, it can make the numbers on any one deal unattractive. I provide a client with a net return model comparing different LVR effects, often an LVR to around 85% range is more cost effective after tax to an investor than an 80% LVR.
Peter makes a good point about DUA's, I recently had a clients loan application for a PPOR on Northern Beaches at a 90% LVR accepted by lender but MI declined based on location. Surprise to all of us. Another lender using the same MI accepted under their DUA which was to 90% without having to go to the MI for review.
