Things have changed in recent times for property investors especially in Auckland where rules have been introduced to curb the property market.
Some of these rules will not affect you now, but as you try to make changes in the future you do not want to be caught out by some of the rules that have been introduced.
Ultimately as a property investor you want to be able to control what you do with your properties.
But why do we say avoid cross securities?
Cross Securities Are Not Good For Any Borrowers
When you have lending on more than one property with the same bank they will link the security properties, meaning the bank controls what you might need to do with the money should you sell the property.
For instance, you have a home with a bank worth ‘say’ $600,000 and it has a mortgage of $400,000. You then buy an investment property worth $400,000 and fund the purchase with the same bank getting 100% of the purchase price; therefore you have two properties with a combined value of $1,000,000 and combined loans of $800,000 which is all okay – until you want to change your home.
The banks have new lending criteria which means they can only lend to a maximum of 70% on the investment property and 80% on your home; therefore you sell your home and net $400,000 but the bank insist that you reduce the remaining debt to $280,000 (70% of the investment property value) so after selling your home for $600,000 (net of all fees) and reducing the remaining debt you are left with just $80,000 ($600,000 – $520,000) to go towards your new home.
To purchase a new home with a $80,000 deposit and remaining within bank criteria of a minimum 20% deposit you would only be able to buy a new home worth $400,000 – some $200,000 less than the home you just sold.
Why would you let the bank have that much control over your future finances when there is an alternative?
Banks Need To Follow The Rules
The Reserve Bank now requires Auckland property investors to have a minimum of 30% deposit when they purchase a rental property property. A property is considered to be an Auckland investment property if it is located in Auckland and is not an ‘owner-occupied’ property.
Banks need to keep within these new rules and that has made it difficult for many new entrants to property investment and therefore we are seeing people looking outside of Auckland where only a 20% deposit is required.
So what is defined as Auckland?
The Auckland Council defines its boundaries. A good rule of thumb is to ask, ‘Who do I pay rates to?’ If the answer is that you pay them to Auckland Council, then the property is in the Auckland Council area.
Rules May Change Soon
There has been talk about these rules being expanded outside of Auckland and possibly other rules may be introduced too.
There could be changes as soon as the the 26th May 2016 when the budget is delivered or the 9th June when the next Monetary Policy Statements is delivered.
The current LVR restrictions only apply to new low-deposit (high-LVR) loans, and not retrospectively to existing loans.
The key is to change things now … before the changes are inflicted on us all.
There Are Non-Bank Options
We also know that there is a shortage of rental properties in Auckland which is going to mean the demand for these is going to remain high for some considerable time. It is therefore still a good time to buy investment properties and with these new rules making it hard for some people it is going to create an opportunity for others.
So if you had $150,000 of available equity you could buy a property worth $500,000 and finance it with a bank using this as your 30% deposit. If this property increased in value by 10% over time then you have increased your wealth by $50,000
On the other hand you could finance the purchase using a non-bank lender that allows you to use just a 10% deposit and using the same $150,000 you could therefore buy property worth $1,500,000 and if this property (or properties) increased in value by the same 10% over time then you have increased your wealth by $150,000.
It’s simple maths really!
Consider What You Are Trying To Achieve
You need to look at the big picture and be in a position to control your own destiny.
Cross security is a common banking term and it protects the bank, but it does nothing to help the borrower, so avoid cross securities wherever possible.
We hope that this article has opened your eyes to the alternatives that are available.
As mortgage brokers we are here to help property investors fund and build their portfolios, and some common sense advice on cross securities has already saved many of our clients some major headaches.
