The L to P of property success (Ep.135)

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In this week’s episode, Dave, Cate and Pete take you through:

  • L – Lenders Mortgage Insurance (LMI). LMI is a type of insurance you can expect to pay if you borrow more than 80% of the property value. Although you pay for it, it protects the lender, not the borrower as above 80% lending is seen as higher risk for the lender in the event of mortgage default and subsequent mortgagee sale. The trio discuss how the insurance premium is calculated, what kind of borrower is likely to have to pay this fee and how you can reduce LMI surcharges.
  • M – the critical components of your Mortgage. The Property Planner takes you through the top 6 mortgage strategies that can greatly impact your wealth and ability to hold property as you grow your portfolio.
  • N – Negative and neutral gearing. Negative cashflow simply means that your investment is running at a loss from a cash flow perspective. This is because the rent earnt doesn’t cover property costs, such as interest paid and maintenance. Negative gearing relates to the tax benefit applied to reflect the investor’s cashflow losses. Although you get a tax deduction, negative gearing is not necessarily a positive thing. It should be considered merely a benefit, as opposed to a reason to invest. Negative gearing means you pay a dollar to get 30 cents or slightly more back from the tax man. The trio discuss the dangers of selecting a property based on tax benefits alone.
  • O – Offset accounts, God’s gift to mortgage strategy! The offset account is arguably the banks’ greatest invention. Effective use of offset accounts forms the basis of many of the mortgage strategies that can enhance your wealth creation such as money management, optimising tax deductions, risk management and the ability to hold onto your home when you upgrade. Take a listen to episode #48, a whole episode dedicated to the effective use of offset accounts.
  • P – Positive gearing. Positive gearing is essentially the opposite of negative gearing. It is where income earnt from your property covers more than the expenses.  A positively geared investor will pay additional tax; a nice problem to have. The trio discuss how gearing is not static and can change over time. It is normal for a property to become neutrally and then positively geared over time. Take a listen to find out why.

Resources

Show notes

  • L is for LMI 
  • LMI is a type of insurance you can expect to pay if you borrow more than 80% of your home’s value. 
  • It’s usually a one-off payment made by the borrower at the time of loan settlement 
  • LMI protects the lender – not the borrower – but you pay for it. 
  • Why do you have the privilege of paying for it? Because the bank sees you as higher risk because of the high LVR. 
  • You don’t need to arrange LMI yourself – your lender will sort it for you. You can borrow the mortgage insurance, but at the end of the day it comes out of your pocket, just like stamp duty. The cost of the premium may change with different lenders. 
  • It’s possible to save on LMI by saving a bigger deposit – BUT can you grow your savings faster than the market moves? 
  • It’s a price most first time buyers have to pay, unless you can get some help from your parents. 
  • It depends on the loan to value ratio and the loan size. 
  • Who benefits from 90% LVI – lawyer, tax accountant, medico professional. There are not a lot of lenders who will provide this option, but it can also depend on income – you need to earn over $150,000 a year. 
  • What can you do to reduce LMI? Go to the bank of mum and dad. 
  • M is for Mortgage 
  • Top 6 mortgage strategies 
    • Offset optimisation – the banks greatest invention! 
    • Money management – making sure your lending and money management interconnects 
    • Optimise your tax deductions through your mortgage and understanding how to do this effectively.  
    • Risk management – mortgage is your biggest debt, so it should be the starting point for managing risk 
    • Maximise your ability to hold property into the future 
    • Repayment strategy – has a huge impact on how to achieve the previous 5 strategies 
  • N is for negative and neutral gearing 
  • Fancy way of saying that the property is running at a loss from the cash flow perspective. The income you receive is not higher than the interest and maintenance cost paid. 
  • Negative gearing is not a positive thing – you pay one dollar and then get 30 to 40 cents back. 
  • Beware of spruikers, many will expound the tax benefits of brand new property, but this can be a danger to fall into. 
  • Yield is reducing – depreciation does reduce over time, rent could reduce as potential vacancy rates as well. And paying capital gains tax on depreciation at the end. 
  • Tax laws can change!  
  • Get the big rocks right – the location and the dwelling overall. Yes you optimise your tax deductions, but don’t buy a property BECAUSE of the tax deductions.  
  • O is for Offset accounts 
  • It greases the wheels of the other mortgage strategies – money management, tax deductions, risk management, hold onto a home when you upgrade.  
  • Some lenders will allow you to have multiple offset accounts, so each of your buckets are offsetting the debt.  
  • Understanding how to property utilise it to ensure that it does.  
  • P is for positive gearing 
  • Positive gearing is where you borrow money, but income earnt is more than the expenses.  
  • In the end you want your property to be positively geared. When you first buy, it could be negatively geared. But after rent grows and debts drop, could cause your property to become neutrally geared or positively geared over time.  
  • Low interest rate environment – with every rate cut your portfolio goes towards more neutral gearing. Increasing and reducing interest rates have the power to adjust the timeline towards positive gearing.  
  • Rental incomes are treated conservatively – rent can have a minimal impact on your borrowing capacity.  
  • From a borrowing capacity perspective, you can be negatively geared, even though you’re actually positively geared.  

Gold Nuggets

David Johnston – The Property Planner’s Golden nugget: his new properties, which he kept when he developed, the rents got the most when they were new. But established properties have grown in rent significantly. People can get confused by yield – a new property could have higher yield. But the established property is likely to grow at a higher rent. This is one of the key distinctions that people get confused about with property.

Peter Koulizos – The Property Professor’s Golden nugget: LMI is a cost of doing business, property prices are going up, don’t hesitate to pay LMI. Mortgage is more than the term and the rate that you pay. And the offset account is the 8 modern wonder of the finance world.

Cate Bakos – The Property Buyer’s Golden nugget: do not confuse redraw and offset, if you’re not certain about the difference, speak to someone who can walk you through it!

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