How to Boost Your Borrowing Power and Get the Home Loan You Need

Saving for a 20% deposit can feel like a daunting hurdle on the path to property ownership. But what if you don’t have to wait that long? Lenders Mortgage Insurance (LMI) can be a powerful tool to help you get into the market sooner.

What is Lenders Mortgage Insurance (LMI)

LMI acts as a safety net for lenders when you borrow more than 80% of a property’s value. It protects them if you default on your loan. While it adds to the overall cost of your loan, it can significantly reduce the upfront deposit you need.

How much deposit do I need to offset LMI?

  • Investment Properties: Aim for a 12% deposit. This allows you to cap the total loan at a 90% Loan to Value Ratio (LVR), keeping your LMI costs manageable.
  • Owner-Occupied Properties: Banks often allow borrowing up to 95% of the property value with LMI. An 8% deposit is a good starting point here.

Do you really need 20% deposit?

Don’t let the 20% deposit requirement hold you back. Here’s why:

The True Cost of Waiting: Property prices are constantly rising. Waiting to save a 20% deposit could mean missing out on potential capital growth. LMI might seem like a cost upfront, but it can help you secure a property sooner and benefit from long-term appreciation.

Which professions get an LMI waiver?

Did you know many professions qualify for LMI waivers? This can significantly reduce your upfront costs and open doors to homeownership. Here are some professions that might be eligible:

  • Medical professionals (doctors, nurses, pharmacists, dentists)
  • Accountants
  • Solicitors
  • Bank employees (check with your lender)

What are the benefits of LMI?

  • Lower deposit requirement (potentially as low as 10%)
  • Access to better interest rates with a higher LVR
  • Faster portfolio building by freeing up capital for future purchases

Additional Strategies to Consider

  • Monthly LMI Payments: Some lenders allow you to spread out your LMI costs into monthly payments.
  • 85% Loan-To-Value Ratio: Consider a slightly higher interest rate with an 85% LVR to avoid LMI altogether. This can be a temporary solution until you can refinance with a lower LVR.

Can I use equity to buy investment property?

Many people in their 40s who have paid off their home loans might hesitate to tap into their home equity for investment. However, using this equity strategically can be a powerful tool to accelerate wealth creation.

Instead of waiting to save up a 20% deposit for a new property, you can leverage your existing home equity to enter the investment market sooner. This allows you to benefit from potential rental income and capital appreciation on multiple properties.

Is it a good idea to use equity to buy an investment property?

It’s understandable to have reservations about using home equity for investment. Stories of cross-securitisation gone wrong can create fear. However, by structuring your loans correctly, you can mitigate these risks.

Here’s how a mortgage broker can help:

  • Separate Loans: Keeping your home loan separate from your investment property loan protects your primary residence in case of unforeseen circumstances with the investment property.
  • Loan Options: There are different loan options available for using home equity, such as refinancing or a line of credit. A mortgage broker can help you choose the most suitable option based on your financial goals.

Beyond the Down Payment: Strategies for Savvy Investors

While LMI is a powerful tool, it’s not the only option for investment-minded individuals. Here are a few additional strategies to consider:

  • Strategic Loan Structuring: A qualified mortgage broker can help you structure your loans strategically. Keeping your home loan separate from your investment property loan protects your primary residence in case of unforeseen circumstances with the investment property. They can also guide you through different loan options, such as refinancing or a line of credit, to find the best fit for your financial goals.
  • Guarantor Loans: For younger investors or those lacking a significant down payment, guarantor loans can be an option. This involves a parent or relative guaranteeing a portion of the loan, allowing you to access the market with minimal upfront cash.
  • Cash Flow Optimisation with Offset Accounts: By keeping your investment property loan separate and using an offset account, you can maintain access to your cash while it earns interest to offset your loan balance. This strategy helps you maximise your cash flow.

Should I Pay Principal and Interest on My Investment Property Loans?

When financing your investment property, you’ll encounter two main loan choices: Principal and Interest (P&I) and Interest-Only (I-O). P&I payments go towards both the loan principal and the interest, gradually building equity in your property. I-O payments cover only the interest, offering potentially better cash flow initially.  However, you won’t be building equity as quickly with an I-O loan.

The best option depends on your circumstances. If you prioritise long-term wealth creation and minimising interest costs, a P&I loan might be ideal. This approach allows you to benefit from capital growth while chipping away at the loan principal.  Over time, this translates to lower overall debt and potentially higher returns.

On the other hand, if you need more flexibility and cash flow in the short term, an I-O loan could be a consideration. This option frees up cash that can be used for further investments or to manage unexpected expenses. However, remember that you won’t be building equity as quickly, and the total interest paid over the loan term will be higher.

EOFY Tax Cuts: Spend or Invest?

When tax cuts come into play, deciding whether to spend or invest those savings can significantly impact your financial future. While spending might provide short-term gratification, investing those tax savings into property or other assets can yield long-term benefits.  Consider using tax cuts as an opportunity to accelerate your property investment journey.  This could involve putting the extra money towards a larger down payment on an investment property, reducing your loan term, or investing in renovations to increase your rental yield.

What is a good property portfolio?

A property portfolio should be strategically built with good quality assets in high-demand areas. Focusing on properties with strong rental yields and capital growth potential can ensure long-term success. Here are some key factors to consider when building your portfolio:

  • Location: Look for areas with good schools, amenities, and easy access to public transport. These factors tend to attract reliable tenants and contribute to increased property values over time.
  • Rental Yields: A strong rental yield ensures a positive cash flow from your investment. Research rental trends in your target area to understand potential returns.
  • Capital Growth Potential: Invest in areas with a history of steady property value increases. This ensures your asset appreciates over time, maximising your returns when you eventually sell.

Engaging a buyer’s agent can provide additional expertise and help make informed decisions. Buyer’s agents have a deep understanding of the market and can help you find properties that meet your investment criteria and deliver long-term value.

How to get passive income from property investment?

Property investment is a marathon, not a sprint.  Building wealth through property takes time, commitment, and a willingness to learn.  However, the rewards can be significant.  With careful planning, expert guidance when needed, and a commitment to long-term success, you can transform your property investment journey into a source of financial security and freedom. Remember, knowledge is power. Continuously educate yourself about the property market, stay updated on trends, and don’t be afraid to seek professional advice for complex decisions.

Taking the First Step

If you’re ready to embark on your property investment journey, the first step is to consult with a mortgage broker. They can assess your financial situation, risk tolerance, and goals to develop a personalised investment plan. Additionally, research your target market, explore financing options, and consider partnering with a reputable buyer’s agent.

By taking these initial steps and approaching property investment strategically, you can pave the way for a brighter financial future. Remember, success comes to those who are prepared and take action. So, why wait? Let us help you start your property investment journey today!

Disclaimer: This blog post is for informational purposes only and should not be considered financial advice. Always consult with a qualified financial advisor before making any investment decisions.