How Lenders Mortgage Insurance can be used for investment properties
- Lenders mortgage insurance (LMI) may help people without a 20% deposit get a mortgage
- While LMI is usually associated with first-home buyers, it can also be a strategic tool for investment properties
- Consider how LMI might create new property investment opportunities
Lenders mortgage insurance (LMI) is usually associated with first-home buyers – and it’s easy to understand why.
LMI is an insurance product that lenders use if home buyers don’t have a 20% deposit. It’s paid by the borrower and is typically added to the amount of the mortgage. But in some cases, you can pay for it separately.
Lenders mortgage insurance protects the lender if the borrower is unable to make their repayments. It doesn’t cover the borrower.
While LMI is often thought of as a tool for first-home buyers to get onto the property ladder, it can also be a strategic tool for investors to use to develop their property investment portfolio.
Using LMI as part of your investment strategy comes with advantages and disadvantages, so it’s important to weigh these up before taking your next steps.
Potential advantages of using LMI for an investment property
LMI can help investors get into the market sooner
If property is part of your investment strategy but you don’t have a 20% deposit, then LMI can help you get into the investment market sooner, maximising the investment opportunity.
LMI can help investors grow their property portfolio more quickly
If you’re an investor who has a 20% deposit for one property, is it more attractive to put 10% into one property, 10% into another, and use LMI to help purchase two properties, rather than one?
The answer to that question is one only you – and your professional adviser – can answer. But by using LMI strategically, you may be able to take a different approach to property investment.
LMI can be tax deductible
If you’re renting out your investment property to generate income, lenders mortgage insurance is tax deductible. It’s generally claimed over the first five years of owning the property, or the term of the loan, whichever is shorter.1 In this scenario, LMI falls into the ATO’s definition of ‘borrowing expenses’.
Potential disadvantages of using LMI for investment property
The cost of LMI can add up
If lenders mortgage insurance is added to your mortgage the cost can add up. It will usually be added to the loan total, which you’ll then pay off over the term of the loan – with interest.
It could affect borrowing power
By adding LMI to the mortgage amount, you’re increasing the size of the mortgage and repayments. This may reduce your borrowing capacity for future investments, as well as impact your monthly cash flow.
LMI can’t be transferred
If you sell your investment property and buy a new one, your LMI can’t be transferred. If you don’t have a 20% deposit for the new property, you might need to pay for another LMI policy, unless you have enough equity built up.
Research, research, research
Property investment is a complex market, and adding LMI into the mix is an additional consideration.
LMI may enable you to enter the investment market earlier and can be another tool in your property investment toolkit.
Remember, it’s important to understand the true cost of LMI, and balance that against what it can achieve for you. You may want to consider getting professional advice before making any investment decisions.
Learn more about lenders mortgage insurance
1 Rental expenses you claim over several years | Australian Taxation Office
