Hi it’s John Anderson. I’m here with property millionaire, and best-selling property author Helen Collier-Kogtevs.
We’ve got a question come in; financing is the biggest challenge I’m facing. This person is finding that they need more mortgage insurance to be able to borrow. It’s happened twice, and they’re not able to see how to get any funding. Any thoughts or strategies that you can give them will be appreciated.
Okay. For the sake of everyone listening, I have to firstly say; when you borrow money from a bank, as a general rule it’s an 80/20 rule. This means you put in a 20% deposit, and you borrow the balance.
When you do that, the banks do not charge you what they call mortgage insurance. And it’s an insurance policy which protects the bank effectively. It costs quite a lot of money; it can cost you a few thousand dollars for it. But the benefit of it is that it’s tax deductible; it’s part of the purchase of the property.
And you don’t actually have to take that money out of your pocket; they actually incorporate it in the loan. So your loan is just that little bit larger because of the mortgage insurance. They capitalise it.
So for most people, they’re happy with the 80/20; 20% deposit, borrow the 80%. However, as an investor, when you want to accelerate your investing and accelerate it quickly, you can leverage mortgage insurance so that you can then borrow more deposit money to then purchase more property.
So sometimes what you’ve got to do is, if you’ve got let’s say a 0,000 property and you’ve got 0,000 in cash or equity to use as a deposit and borrow the balance, which is 0,000 – that’s the 80/20 rule. Instead of doing the 80/20 rule, if you do a 90/10 rule, it means that 0,000 can now purchase two properties if you’re putting a 10% deposit down.
Now, you might be paying a few thousand dollars, ,000 in mortgage insurance; let’s say ,000 for the sake of this conversation. It gets capitalised on the loan, but your ,000 is used as a deposit, and the other ,000 you could be buying a second property of the same value.
So you’ve now got two properties working for you, earning you capital growth, earning you income; and then when you look at the cost of mortgage insurance – let me grab a calculator right here. If we’re talking about mortgage insurance at 5%, we’re talking about 0 in interest a year. It’s not really a big deal in the whole scheme of things.
If your property grows at 6% a year, it’s going to double in let’s say 7-10 years; so you’ve made 0,000 of capital growth extra by buying that second property for the sake of a few hundred dollars a year. If you’ve done the research, and you’re backing yourself; in my humble opinion it could be a no brainer.
It could be a no brainer. But again, I just need to say that people need to understand not to launch into doing a 90/10; they’ve really got to make sure it suits their strategy and their risk profile. If they’re not comfortable borrowing that extra amount because you’re leveraging yourself pretty high now.
In some instances, it can really serve you, but in other instances in some circumstances for people…
Might depend on your age, your risk profile, how much equity you’ve got, and what your buffer is.
Yeah what your buffer is; all of those things could actually mean that you stay within the 80/20 and just go about investing in a slower way. That’s the thing. So mortgage insurance is good to some degree. It can help you leverage and accelerate you, but at the end of the day it’s really got to suit your strategy.
Understood. Thanks Helen.
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