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March 26, 2014

The three words that saved my property dream

By LAUREN CROSS

There are three words that I just love to hear. One starts with ‘I’ and another with ‘L’. But it’s not ‘I love you’.

Lenders’ mortgage insurance. They’re the three little words that can dramatically get you started in investing and help you on your way to building a portfolio, especially in a hot market. It’s not complicated. But unlike Cheryl Cole and Will.i.am’s ‘Three words’ song, lenders’ mortgage insurance does seem to be underrated.

That’s because most people prefer to save a 20 per cent deposit before they buy a property, as it means they won’t have to pay lenders’ mortgage insurance, otherwise known as LMI.

LMI is basically an extra payment you have to pay to the bank if your deposit is less than 20 per cent, in case you default on the loan. But it doesn’t actually protect you, it’s merely insurance to protect the bank. So you’re still up the creek without a paddle, so to speak, if you do happen to default and can’t pay your loan. Nevertheless, LMI can be seen as an unnecessary cost and a waste of money for some homebuyers and investors.

I’ve never been a good saver but I’ve always been pretty good with bills and making repayments on time. So I see LMI as a fabulous opportunity to buy in a market sooner rather than later. Around Australia, many markets are now rising – often rising faster than you can save. So for example, it might take 10 months to save a $30,000 deposit but when property booms, values can easily rise by that much in the same period of time.

That’s why I personally feel it’s always better to buy as soon as you can and pay LMI when you have to. I’m no accountant or financial expert but, like all API readers, I love property and the benefits it provides.

Another beautiful thing about LMI is that you can actually claim this as a tax deduction and with the end of the financial year just around the corner, you wouldn’t have to wait for too long to claim it back. Awesome!

LMI has also been great in my own investing journey. A couple of years ago my husband and I had to pay a pretty big LMI fee – I think it was about $15,000. But this allowed us to buy a property at $621,500, which had a bank valuation of $700,000 at the time.

So by forking out the extra $15,000 and bringing the purchase price up to $637,500, we instantly made about $65,000 in equity. At the moment, we can refinance and we’ll have about $100,000 to use as a deposit (is that not the most exciting thing when you have money to spend! It’s a bit like being given a credit card and told you can go shopping at Myer.)

Once again, I’m predicting we can use this as a 10 per cent deposit on something and pay LMI again. See what I mean – it just allows you to buy better property, and much faster.

It means another property wouldn’t necessarily be limited to a purchase price of $500,000 (using $100,000 as a 20 per cent deposit). Yep this truly is a girl’s best friend, only this time it’s good debt! Unlike those shoes at Myer!

Brisbane seems to be picking up the pace pretty quickly and I don’t see the point saving for another 12 months when the market might gain, say, four or five per cent over the next year. Even with that conservative estimate and a property priced at $500,000, that would be an equity gain of $25,000 in one year.

You can soon figure out LMI might help you from missing out and it’s all about opportunity cost – getting in when the market is rising, sitting tight when it stabilises.

About Lauren Cross

Lauren Cross is a journalist and former Deputy Editor of Australian Property Investor magazine.