Finance advice
Avoid this trap from the banks

LMI: How you can avoid this trap from the banks

By Sasha Karen

Lender’s mortgage insurance (LMI) is a quicker way of getting your hands on a property but going along with it could spell bad news in the long run if you fall into a particularly nasty trap.

For investors who do not have enough money for a 20 per cent deposit, LMI may seem like an attractive option, where the bank takes out insurance on the value of the property.

Essentially, LMI is a case-by-case scenario, but if you do not have enough for the 20 per cent deposit, if the value falls, you decide you do not want the property, it sells for less and the loan is larger than the sale amount, the bank can recoup the loss of funds through you.

Speaking at a panel hosted by financial planner Fox & Hare Financial Advice, buyer’s agent Kellie Landrey said that she recommended to her clients to go in with a full 20 per cent deposit as LMI can take up a considerable amount of savings.

“On a $600,000 property, it could be [$15,000] LMI. That’s a big chunk of your savings that you’re paying towards insurance that doesn’t go to the value or your capital investment in the property,” Ms Landrey said.

“So ideally, if you can save it, it’s ideal, but if it helps you get in the market, there’s other arguments to say … if the property prices are going to go up over the course of the three years, it takes you to save that extra 10 per cent, then you’re potentially going to be winning because you’re going to be buying in at this point of time as opposed to three years’ time.”

Glen Hare, co-founder of Fox & Hare Financial Advice, warned investors to not fall for the misconception that LMI protects borrowers.

“There’s often a misconception around [LMI] that it’s insurance for the borrower. It’s not. It’s for the bank, so you’re paying the insurance premium for the bank, so their position is secured,” Mr Hare said.

However, for investors that believe a property is well and truly worth the risk, LMI can be a helpful way of getting that perfect property.

“Property is a really great way for forced savings, I think, and [LMI] is, it can be really expensive, but it’s definitely worth looking at ... if it helps you get into the market to start growing your wealth,” he said.

“It’s a hard part, I mean, ideally you want the 20 per cent, …but if the numbers add up and you feel the property is a good investment, and you’ve looked at every different scenario, your tax, your cash flow, everything, then it’s just something else to consider.”

One trick that banks can play on investors is to lend more money to cover LMI itself, which as Mr Hare points out, covers the bank one way or the other, but there’s a hidden side effect to be wary of.

“If you do go down the path of increasing your loan to pay for their insurance, you’re obviously also paying interest for the loan for their insurance,” Mr Hare warned.

In order to avoid LMI entirely, investors can rely on a guarantor, like a parent, to pay the deposit on your behalf, but doing so impacts on your cash flow situation, because any income from rent to pay off the mortgage would, depending on the agreement, also have to go to the guarantor and, as Ms Landrey pointed out, you will end up being 100 per cent geared in terms of borrowing.

As a result, if the rental income is not high enough, your profitability on the property could be minimal to not at all.

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  ["title"]=>
  string(51) "Boost for investors as app sets up off-site bidding"
  ["alias"]=>
  string(55) "boost-for-investors-as-new-app-sets-up-off-site-bidding"
  ["introtext"]=>
  string(144) "

Property investors are now able to identify and bid on auctions remotely using a new live-streaming functionality launched by Gavl.

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Called “Request an Auction”, the new functionality enables users to watch and bid on any Sydney or Melbourne auction remotely.

Through Gavl, prospective buyers are now able to register to bid on their preferred auction. The platform will obtain permission from the listing agent and confirm within 48 hours.

Vendors can also request to have their auctions broadcast to a larger buyer audience.

Co-founder Joel Smith said that auctions streamed on Gavl attract 47 per cent more viewers than traditional ones.

He said that Request an Auction will be valuable for remote buyers.

“Buyers are able to have Gavl attend any auction they nominate, so they will never have to miss out on an opportunity due to logistical complications in physically attending the auction.

“Vendors, too, have the opportunity to directly book an auction with us, so they can open up their event to buyers all around the world. With more potential buyers, they’re giving their property the chance to receive more bids and maximise their sales result.”

Mr Smith said that prior to the Request an Auction app, buyers were limited to what they could achieve through the Gavl technology.

Gavl is a live-streaming and bidding platform for real estate auctions.

Mr Smith said that it has streamed more than 6,000 auctions, which have achieved 3.5 million views from 50 countries.

Gavl’s Request an Auction function is currently being offered in Melbourne and Sydney only.

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Boost for investors as app sets up off-site bidding
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Having to split her time between Hong Kong and her original base of Sydney has not slowed Julia Tita’s goal of building a high-performance Australian property portfolio. Instead the resulting alterations to her strategy have positively impacted her investing success.

" ["fulltext"]=> string(3579) "

Having recently purchased her 6th property, Julia joins host Tim Neary to discuss her journey, share her ups and downs over the years, and reveal her thoughts on why some properties are better than others.

Julia also explains why she no longer makes a move without the help of a buyer’s agent, why working with a strong team of specialists is extremely important and discloses her long-term property ambitions.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

Why is Australian property so unaffordable?
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Going global
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AREAS MENTIONED:

Eagleby
Charters Towers
Townsville
Brisbane
Paddington
Sydney
Orange
Melbourne 
Glen Iris
Bondi

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["secure"]=> int(0) ["page_description"]=> string(11) "sample desc" ["page_rights"]=> NULL ["robots"]=> NULL ["access-view"]=> bool(true) } ["initialized":protected]=> bool(true) ["separator"]=> string(1) "." } ["displayDate"]=> string(19) "2018-06-18 03:15:56" ["slug"]=> string(72) "18171:how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" ["catslug"]=> string(28) "45:smart-property-investment" ["link"]=> string(92) "/investor-stories-1/18171-how-a-move-to-hong-kong-impacted-julia-s-australian-property-goals" }
How a move to Hong Kong impacted Julia’s Australian property goals
object(stdClass)#1213 (52) {
  ["id"]=>
  string(5) "18159"
  ["title"]=>
  string(88) "‘Common’ referrer practice of being paid on both sides of the fence coming to an end"
  ["alias"]=>
  string(82) "common-referrer-practice-of-being-paid-on-both-sides-of-the-fence-coming-to-an-end"
  ["introtext"]=>
  string(246) "

The practice of property investment firms sharing undisclosed kickbacks among the supply chain involved in development sales will be outlawed in NSW on 1 July this year under the Real Estate Reform being handed down by regulators in NSW.

" ["fulltext"]=> string(2238) "

Property commentator and valuer, Suburbanite’s Anna Porter, said the reform will address conflicts of interest.

She said they arise when a mortgage broker, accountant or financial planner receives part of the commission from the property firm, who receive their fees from the developer or seller.

“This puts the broker into a position by which they are being paid on both sides of the fence,” she said.

“Until now this has been a grey area and there was nothing stopping this practice.” 

Ms Porter said this has been a common practice in the industry.

"Some well-known mortgage broking firms openly admit to receiving $5,000–$10,000 per referral in their pocket.”

She also said this process has been going on for decades.

"Property investment firms commonly pass some of their commission on to the mortgage broker, accountant or financial planner as a reward to them for passing on the referral. This means that many brokers or financial service providers are making significant amounts of money just to refer on to a property firm, often totalling hundreds of thousands of dollars a year," Anna Porter said.

Ms Porter said the Property, Stock and Business Agents Amendment (Property Industry Reform) Bill 2017 will be in force from July this year, and will prohibit this practice unless the broker or referring partner also holds a real estate industry license.

"Under the new laws, if the broker takes a referral fee from the property firm, they will have to be a licensed real estate agent and also hold a corporation’s license,” she said. 

“Subsequently, every transaction that they receive a referral fee from, they will be putting their license up against the transaction and taking full liability for the conduct, practices and outcome of that transaction, even if they have little to do with the transaction; they are a party to it financially and therefore take as much risk as everyone else in the transaction.”

Mr Porter said where a referrer holds a real estate license, and receives a part of the sale commission, they may find themselves in breach of the ethical requirements under the act.

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‘Common’ referrer practice of being paid on both sides of the fence coming to an end

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