When you own more than one property the bank will want to link your properties, and while it is the easy option it is not the best option.
You need to retain control over your properties and finances, and it’s easy to lose control and options when the bank has linked your properties together.
Of course a bank or a non-bank lender likes to have the control so they can manage things if something goes wrong, but this is to protect the interest of the bank … not your interests.
The key thing to understand is you do have options.
Banks Will Link Your Properties
As advisers we have seen that people can be controlled by their bank and get badly caught out when they sell if they rely on one lender.
It’s something that is not often talked about, but the risks of linking properties is real and should be explained … but rarely is.
Lenders will almost always insist on cross-collateralisation which is linking all properties as security for lending.
They say that this “must happen” but that is just because the banks policy may say this. It doesn’t mean that you have to offer the banks all of your properties for security, and it doesn’t mean that you have to have all of your lending with a single bank.
Banks will link your properties as it gives the bank more control which lowers the risk to the bank.
Financing Properties Together Versus Keeping Separate.
Of course it’s easier to lump your properties and lending together and of course the banks always do this as they have no option.
“Easy” is not a good reason to do anything!
Often when someone wants to sell a property the banks are recalculating the financial position and can ask for proceeds of a sale to be used to pay down debt.
It’s all about ensuring that our clients get the right advice and can retain as much control over their finances as possible.
We cannot predict the future and over the years I’ve seen enough people in sticky situations because the banks (and some lazy brokers) have lumped finances together.
This includes the mortgage on the home, lending on rentals and business lending.
Bank Policy Changes Can Catch You Out
Something as simple as a bank changing their policy can catch you out and cause problems.
We have seen this with the introduction of the loan to value (LVR) restrictions that we imposed by the Reserve Bank a few years ago, and while those have been removed it is important to remember that the changes to LVR made earlier this year are temporary for 12-months from 30th April 2020 and will expire on 30th April 2021 unless the Reserve Bank decide to extend this.
Of course we do not expect that the LVR rules will be reintroduced, but it could happen.
Here is the link to the Reserve Bank announcement: CLICK HERE
This is a valid reason for keeping your investment properties separate and why most good mortgage brokers are suggesting keeping properties separate.
Plus it’s one very good reason to keep rental properties separate from any owner occupied home too.
It Does Happen … LVR Rules Caught Out People
In recent history this same issue caught out a lot of people when they restricted lending on rentals to 70%.
If someone had a home and rental with one bank it might look something like this;
| Home | Value $1,000,000 | Lending to 80% | = $800,000 |
| Rental | Value $600,000 | Lending to 80% | = $480,000 |
| $1,600,000 | $1,280,000 |
They then want to change the home to say the same value $1,000,000 and in the meantime the rules have changed.
The bank reassess on the new rules (80% LVR on home and 70% LVR on rentals)
Assuming the same values for illustration purposes it would look like this;
| Home | Value $1,000,000 | Lending to 80% | = $800,000 |
| Rental | Value $600,000 | Lending to 70% | = $420,000 |
| $1,600,000 | $1,220,000 | ||
| Amount that the bank require to reduce LVR | $60,000 | ||
This would get worse if you want to spend more or have higher value of rentals.
Situations like this are more common than most people think.
As mortgage advisers we are often contacted by people who have found out that the bank have all their properties tied up together, and this week we have had two separate people with exactly this issue; hence the reason to write this on our finance blog.
Advisers Should Offer The Best Advice
As responsible mortgage advisers the benefits of our clients need to be the top priority.
We need to always recommend that that you do not link your properties, but instead keep your properties with separate banks.
Sometimes it may seem easier to stay with the one bank, and if that is what you choose to do then at the minimum we like to ensure that you are made aware of the risks with lumping them together. Furthermore expect an adviser will also document that they have provided this advice so there is no comeback when things go wrong.
It’s a pity that banks will not be held to the same levels of professionalism; however when they are only able to offer a single product then they are not going to be advising people to go see their opposition regardless what is best for the customer.
Think very carefully and seek advice before letting the bank link your properties.
