Paul Glossop: Welcome guys to Pure Property Investment one-on-one. Today I’m joined by Munzurul Khan. Munzurul is the principle of Keshab Chartered Accountants. Today guys, we really wanted to speak about a quite a topical aspect of property and finance and structuring at this point in time, given the changes in the credit policy and APRA and how the banks are starting to regulate different amounts of money being lent. And the question that I wanted to pose Munzurul today, and I think something we get approached by our clients a lot is, lenders mortgage insurance and the premium; whether it’s worth it or not worth it, and going to a 90% LVR versus an 80% or versus something completely different. The pros and cons from a tax perspective. Munzurul if you wouldn’t mind sharing with our viewers a little bit of insight on that.
Munzurul Khan: No absolutely, absolutely. So I suppose Paul, what lenders mortgage insurance is, it’s an extra premium that one needs to pay if your borrowing is over a certain limit. And generally speaking it’s about 80 % as such. So you pay an additional premium. Very often what the bank does is that bank capitalises that on your loan. So as an example if you borrowed 90% it’s not necessarily 90% as such, it’s probably about 88.5%, say as an example, plus the LMI – Lenders Mortgage Insurance which goes through 90%. But nonetheless, one way or the other you actually pay it. Whether you pay it up front or whether you capitalise and pay it over a period of time.
The question I suppose comes in is that, what is the tax ramifications whether it all well as such? The tax ramifications to this is that the lenders mortgage insurance is deductible over a period of five years or term of the contract whichever is the lesser. So because the loans are generally about 25 years, 30 years, it can be claimed over 5 years, right. So it is a tax-deductible expense, that’s the first comment. So I suppose the question then comes in is that, is it worthwhile?
Well look I as an accountant, I’m all about cost savings and I would like to go with 80% because it is safe and its conservative and you’ve got a bit more equity in your hand. But at the same time I try to take a step back and I sort of say that, well perhaps if the LMI- the Lenders Mortgage Insurance is just about say four or five grand on an additional purchase, if that allows you to buy an additional purchase of say three hundred thousand so you’ve got an additional capital asset of 300,000, assuming that you bought it well and assuming that it grows over period of time, it’s a growth asset, right?
So whether it grows 5%, 6%, 7%. If I just simply do the numbers and if I sort of say that, well conservatively let’s say 6% growth on a 300,000-additional asset, that’s the $18,000 additional equity that you have. And you’ve got access to it and then it becomes compounding, that is that $18,000 increases all the time. That is an asset that you would not be having if you were not to go through with the LMI. So we prefer not to go with the LMI. But very often what you find is that when you start with your investment journey perhaps you sort of go a little bit more assertive, build your asset base, pay the LMI, claim the tax deduction and then over period of time take a step back where your portfolio becomes a bit more conservative.
Paul Glossop: Very good point mate. I think there’s probably two things that I take from that, one is that LMI, for the most part for the right person with the right strategy is an enabler. But it comes down to the asset. There’s no point going, it’s a 90% territory or anything in that range, paying Lenders Mortgage Insurance if the asset you purchase is a dud. And that obviously is irrespective of the property, LMI not LMI, you really need to make sure that property is the right property, that is part of your strategy and your objective, and grows over time. And the second part which you’ve said the hardest part as an investor, and an investor who wants to build a large portfolio, is it’s always the same adage of the hardest million to make is your first million. Because you really have to start from a very small either capital base or asset base, so what that LMI does in that space is it enables people to get larger exposure to the market which can grow exponentially as compared to the small amount of outlay that that lenders mortgage insurance may cost. And it’s tax-deductible.
But again guys, I think without a shadow of a doubt the biggest point here is that it needs to fit your strategy and your objectives and also I think going into an 80% or 90% LVR territory also comes down to your level of income and your disposable cash. All these things come into the fold, and I think part of that really folds into a very tight objective and strategy, which you should be setting before you buy your next or your first property.
So worthwhile having a discussion with an accountant like Munzurul. Or setting that strategy objective before we buy that property with a team like my own team, I guess on our back end here as well. So look if you do want to get in touch with either Munzurul or myself feel free. The numbers are at the bottom of the screen and will no doubt chat very soon. Cheers!