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Lenders Mortgage Insurance
The Secret that
Professional Investors Use

You may have already discovered lenders mortgage insurance (LMI).

Perhaps a loan officer mentioned it in passing during your borrowing capacity assessment interview.

You should always have your finance capacity assessed prior to looking for property. This will do several things for you when looking and evaluating properties.

1. Firstly it will help you to home in on the right property type and price range of property to look at and avoid wasting your time.
   


2. Secondly when you do find a property that fits your property investment criteria
   then you are in a more powerful position. Both in terms of bargaining for the price you will pay negotiiating the terms that suit you best.

Lenders Mortgage Insurance is a Tool

Do not view LMI as an expense to be avoided.

LMI is a very useful tool that will improve your real rate of return or return on equity invested. I will outline the way that this works below.

Because you can borrow more, with your existing financial resources, LMI will also help you progress faster toward acheiving the property investing nirvana that you are seeking. Whether that be total financial independance, extra money to give to the worthy cause of your choice or the knowledge that you have total financial security.

For now just say that if you want to buy a property worth $100,000 then the bank would normally ask you to come up with $20,000 for the deposit. Which is a standard requirement of many banks.

This is where lenders mortgage insurance (LMI) comes into play. Using LMI you can reduce the amount required for the deposit to as low as 5 percent, perhaps less, depending on your financial institution.

LMI is Your Greatest Ally

Many new investors see a request from the bank to use of lenders mortgage insurance as an added expense. An additional cost barrier imposed by the banks to stop you from acheiving your investment goals.

Do not look at it this way. LMI is your friend. Professional investors (this means people like you) see the use of LMI as their greatest ally when it comes to obtaining the finance they need.

As I will show you below LMI is a very useful tool for real estate investors

LMI is a Capitalizable Expense

The great thing about using lenders mortgage insurance is that you can generally add the amount that LMI will cost you on to the amount being financed.

Why is this so beneficial to you?

Because it saves you using your precious available capital or equity. This can make an substantialf difference when you want to move on to your next investment property.

Is LMI a Tax Deduction

Lenders mortgage insurance can be viewed as a cost of doing business.

As such it can be deducted from your gross income when it comes to tax time.*

Your gross income is the rental income from your investment property and any other income you may have to declare in a tax year.

LMI Improves Your Return on Equity Invested

Quite simply put lenders mortgage insurance will improve your return on equity invested by allowing you to invest less equity in each property you buy.

So from the example above, using the standard requirement of the need for a 20% deposit with a $100,000 property. This would give a loan to value ratio of 80% and then your capital requirement would be $20,000. ($100,000 x 20%).

If the value of your property were to go up by 10% in one year to be valued at $110,000 then your net increase would be $10,000.

This equates to a 50% return on equity invested. ($10,000 / $20,000 x 100)

If by the use of lenders mortgage insurance you were able to reduce the deposit requirement ot 5% or $5,000 ($100,000 x 5%) and your property rose in value by the same 10% then ou would have a 200% return on equity invested. ($10,000 / $5,000 x 100) of 80%.

If you had $20,000 to invest you may think great, I'll just pay my $20,000 deposit and get my investment property. But if you used LMI you could lower the capital requirement to just $5,000.

In this case you culd then afford to purchase 4 properties instead of just your original one.

What's an LVR?

For a more detailed explanation see the loan to value retio page here.

For now it is enough to say that banks use your loan to value ratio (LVR) to calculate the level of debt (risk from the banks point of view) that they would be acceptable for a particular asset.

Some banks and financial institutions are more strict on this criteria than others, especially in the light of the sub-prime mortgage crisis that has caused a stir with less than optimally financed properties.

However that will not be you. You are aiming to obtain premium quality financing at terms favourable to you, not the banks.

And this is very acheivable, thousands of people have done it before you and millions more will do it in the future.

The Benefits of LMI - A Summary

In summary, lenders mortgage insurance can reduce your capital outlay requirements, enable you to progress faster with your property investment ambitions and improve your return on investment for any property.

Quick Links:

• Lenders Mortgage Insurance
  
• Borrowing Capacity Assessment
  
• Property Investment Criteria


• Loan to Value Ratio

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