All your eggs in one basket?

If you, like many of my clients, have multiple properties but they are all with a single lender – have you asked yourself whether that’s the best strategy? 

Why give a single lender more security than they require? 

By not giving more than you need, it’s often better to have it available for leverage with either the same bank or another bank at a point in the future when you might wish to purchase further properties or secure additional lending.

I have this conversation often with my clients.  In my experience, splitting securities becomes an option with larger portfolios when often, a borrower has more than enough security in their established portfolio but they haven’t optimised LVR lending ratios.

An example would be; a client/borrower has 5 existing investment properties valued at a total of $2M and existing lending of $850K.  With a main bank, the potential additional lending available is $550K on his existing securities to purchase a property.

He secures the lending and purchases the property.  So many investors I have met automatically assume they must give that new security to the lender that has provided the additional lending against the existing securities – it’s in the loan documentation after all…..but that isn’t necessarily the case.

Fast forward 6 months and you wish to purchase another property.  Previously, you would be beholden to your existing lender and if you did wish to shop around, you would need to apply for a security release/restructure and redocumentation.  However, because you didn’t offer up that new security 6 months ago, you now have this available as equity/security to offer any Lender (along with the new place you want to purchase) and you are now in control.

That’s not to say you wouldn’t offer your current lender the option, but the difference is – you have the upper hand and you can shop around if you choose.

But there are some other key reasons to be more considered in your approach:

  1. Different lenders have different categorisations of what is deemed a commercial property v standard residential and this can make a considerable difference to rates. 

  2. Lender policies change – we are seeing certain lenders steadfastly applying Residential Investor Rates on existing customers lending when it comes up for refix and yet others are offering the same rates for Investment and Owner-Occupied Lending (generally if there is an owner-occupied security in the mix).  Given this - being too entangled with a single lender can make it harder to change and untangle later.

  3. Each security and the lending against it is generally worth an additional cash contribution from the lender but there is a maximum a lender will pay so potentially splitting lenders and securities has more benefits than downsides – and a broker will help with the administration overhead associated with this.  This consideration generally only applies when you are tapping out over around $1.5M of lending at a time.

I review my investor client portfolios every 6-12 months (depending on their level of activity and their strategies) to ensure they are optimally structured – because it’s important to plan ahead.

Not all banks see things the same way.  Use your securities wisely, keep your options open and ask us to review your strategy and options together – with you.

Paul Dow – Mortgage Advisor

Proud Gold Sponsor of The Tauranga Property Investors Association (TPIA)