The Power of Leverage and Saving on Lenders Mortgage Insurance.
Arguably the most important element of successful property investment that is largely overlooked is the power of leverage.
Leverage allows a property investor to control a large property portfolio or even a single home for only a fraction of its actual value.
Broadly speaking, most banks and lenders require a homebuyer to come up with a 20% deposit meaning the property will have an LVR of 80%. This alone is far more leverage when compared with most other asset classes. And it’s that leverage that allows your initial cash deposit to increase in value exponentially over time.
However, there are ways that this multiplier effect can be increased even further.
From the perspective of the lender, when a homebuyer wants to purchase a home and they have less than the required 20% deposit, there are still some options. The main way to achieve a higher LVR is to pay lenders mortgage insurance or LMI. LMI is insurance for the lender, in the event that the borrower defaults on their loan and there is a potential shortfall.
However, depending on your occupation, there is a range of professions that are able to access higher LVRs with no LMI. Our clients who are predominately in fields such as medical, accounting and finance, or legal can generally access higher LVRs without having to pay the additional cost of LMI.
In years gone by that could mean loans with LVRs as high as 95% or even 100%, without paying LMI. Since the onset of COVID-19, lenders have started to wind those exemptions back and now across the board, it’s still possible to access up to 85%.LVR’s without paying LMI.
Given our relationship with certain lenders, we are also able to help our Australian Expat clients who are not in those specific fields, access that same higher LVR at 85%.
That means that if you’re a young couple working overseas who doesn’t quite have a big enough deposit yet, but you do have a stable and secure income, you could now theoretically get access to the same loan products as a surgeon working in Australia.
That is a big advantage to new investors who might just be starting out and who want to get a foot in the property investment door. And as you’ll see this unique benefit, can make some big differences when we start looking at what leverage can really do.
Recently I had a client come to me who was looking to purchase an investment property valued at around $850,000 but wasn’t sure if they could access the finance because they didn’t have a large enough deposit.
Based on conventional lending requirements, this person would have needed to have around a $170,000 deposit plus have enough to cover stamp duty and all other costs. At that point in time, they had closer to $90,000, but they did have a well-paid role in Hong Kong with a stable income.
In this situation, not only could we access an 85% lend, which would bring that initial deposit down by around $42,500, but if you were to buy a property off the plan, you would in fact only need to put down a 10% deposit which would have been $85,000 and well within their budget.
This person said they would be able to comfortably save the remaining 5% required for the 85% LVR loan plus costs over the next 18 months during the construction period and then ideally even see some growth in the value of the property when it comes time to settle.
In practice, what has happened is that they were able to take control of an $850,000 asset with only 10% deposit while saving on LMI at the same time. With a plan in place to only come up with another 5% of the purchase price plus costs 18 months later.
LMI, if it was available, in this instance could have cost up to $15,000-$20,000 which would have severely limited their ability to buy a property at this price point.
These are some of the strategies newer investors need to pay attention to as they can help tremendously as long as certain safeguards and insurances are in place to ensure that unexpected events don’t disrupt these well-made plans. While leverage is a very powerful tool, knowing how to maximise its power is just as important.
We find that many Australian Expats are not even aware that they access these benefits to help them take advantage of the low Australian dollar to help them invest very cost-effectively.
