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In This Video:

00:31 Never borrow more than 80%, never pay mortgage insurance
01:50 Break the rules!
03:25 Put all your risk management in place

Good day everyone, Damien here again. And today’s video is the next in my series in the “What You Were Taught Wrong about Money “. Today we’re going to deal with “Never Borrow More Than 80%, Never Pay Mortgage Insurance”. I hear this all the time. Now, what’s really interesting about this is that it’s actually not very good advice. And I’ll tell you why.

Never borrow more than 80%, never pay mortgage insurance

Let’s say I’ve got a $100,000 to invest. And I decide to go and purchase a $400,000 property, because I’m going to follow this rule: never borrow more than 80%, never pay mortgage insurance. Now, if you borrow more than 80% of the property, they’re going to charge you mortgage insurance. And that could be $10,000, $15,000, $20,000. It could be a lot, especially when you’re on that price point. You think like “Oh, Jeez, that’s a lot of money. I’m not going to do that. I’m only going to borrow 80%.

So you buy one house for $400,000 and you have an $80,000 deposit because that’s what you need on for a 20% deposit on a $400,000. And then the other $20,000 goes to your stamp duty and legals. And you spend your $100,000 and you’re on a $400,000 home with a $320,000 mortgage.

Now, where will we end up? Well, talked about double cycles in equity, we don’t try and predict how many years it’s going to take. We just say, in however many years it is to double, where would you be? Well, your property will be with $800,000, because $400,000 double is $800,000. And your mortgage, if it interests for you whole time the, in a worst case scenario will be $320,000 still. So you’ll have made $480,000 if you follow that rule, in one double cycle buy one house for $400,000 with a $320,000 mortgage, double cycle later it worth $800,000, it’s $320,000, you’ve got $480,000 of equity. Remember that figure. Follow the rule you’ll end up by $480,000.

Break the rules!

Now, let’s come back a step. Now we are going to break the rules. Now, what we’re going to do is gear right up. And with that $100,000, we’re going to buy 2 $400,000 homes. We’re going to get in there with the bare minimum deposit. And we’re going to pay the mortgage insurance. We’re going to pay everything else. And let’s say with the mortgage insurance added all in, we ended in a mortgage of $380,000. So, we are really geared right up there. That’s okay, especially now that the interest is quite low mortgage is quite low, we could fix it for 5 years. That’s okay as long as the rent and the tax return are still covering the bills, it’s okay to do that. Don’t do that on a hugely negatively geared property. In fact, don’t buy negatively geared property. Well, let’s us say hypothetically, we’re going to break the LMI rule, we now have 2 $400,000 properties with $380,000 mortgages on each. What happens in the double cycle? Well, over on the other side of the cycle, we now got 2 $800,000 homes, in the first example we had 1, now we’ve got 2. So, $1,600,000 worth of property. Now, if we kept that $380,000 mortgages interest only the whole time we have $760,000 in good debt, still there. But how much equity would we have? The answer: $1,600,000-$760,000 is $840,000 of equity.

Now, in the first example where we follow the LMI rule, we end up with $480,000. So, now we have an extra of $360,000 of equity, because we did not listen to the rule. We pay the mortgage insurance up front.

Put all your risk management in place

So, don’t pay the LMI rule? I believe it’s wrong. As long as the property pays for itself with the extra debt, then, gear up. Put all your risk management in place and hang to it, hang to it forever. And you will get a lot, lot more money. The desire to save that mortgage insurance at the start, minus that to $10,000, $20,000, $30,000 grant up front. But it lost $360,000 1 double cycle later. When you do the numbers, the numbers don’t lie.

That’s it for me today. If you learn something from this post, please comment like, and share this with your friends. Let’s get this knowledge out there. But just a word of warning on gearing up, you are going to make sure that you’re getting that healthy yields and a good tax returns and a low maintenance costs to keep the cash flow going. If you try to look for those sorts of property, come and talk to us so we could help you do all that. That’s it for me. I’ll see you next week. Cheers!

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