Property Investing 101: The ‘One Bank’ Trap

by Oct 31, 2024Mortgages

 

When it comes to investing in properties, many people find themselves faced with a common question: Should you secure multiple properties with the same bank or spread your investments across different lenders?

This decision is not to be taken lightly, as it can significantly impact your borrowing power and financial flexibility.

In this blog, we’ll explore the concept of cross-securing properties, commonly known as cross-collateralisation, and the potential risks associated with it.

By understanding these risks, you can make informed decisions that will maximise your borrowing power and protect your financial future.

Understanding Cross-Collateralisation

Cross-collateralisation occurs when a lender interlinks multiple properties as security for a loan. All banks do this in New Zealand, even if you think one property is ‘freehold.’

In other words, if you have multiple properties secured with the same bank, they will consider all of them collectively when assessing your borrowing capacity and may restrict what you can do with one of them in the future.

This approach provides added security for the lender, as they have a broader range of assets to recover their funds in the event of default. Remember, a bank does not have to agree to release security and may swallow up equity to reduce its debt elsewhere.

However, for you, the borrower, cross-securing properties can have negative consequences that you should consider before making that final decision.

Exposure of Your Family Home to Investment Debt

One significant risk of cross-collateralisation is the exposure of your family home to investment debt.

When your family home is cross-secured with your investment properties, and you default on your investment loans, your lender has the power to sell your assets, including your family home, to recover the remaining loan amount – which can put your most valuable asset at risk.

To mitigate this risk, you can leverage your equity without the cross-collateralisation structure.

By securing each investment property with different banks, you can protect your family home from being entangled in your investment debt.

Vulnerability to Interest Rate Rises

If you have all your properties with one lender and that lender’s interest rates are higher than those offered by other banks, you may end up paying significantly more in interest costs.

Additionally, when your loans come off a fixed term and need to be re-fixed, you may not be satisfied with the interest rates offered by your current bank. The same applies to the term ‘interest only’, if applicable, as this can have a major impact on cashflow.

Switching to another lender can be challenging if your financial circumstances or the bank’s policies have changed, leading to a lack of flexibility that may result in significant rate increases and further strain on your finances.

Diversifying your mortgage portfolio across multiple lenders allows you to mitigate risk, take advantage of competitive interest rates, and retain the flexibility to switch lenders if needed, ensuring the most favourable terms for your investments.

Loss of Control Over Sale Proceeds

Another significant drawback of cross-securing properties, which has caught a lot of buyers off guard, is the potential loss of control over your sale proceeds.

When you decide to sell one of your properties, the lender will review your borrowing capacity and equity levels on the remaining securities.

The lender then has the authority to determine how much you need to repay, leaving you with little to no control over the net sale proceeds. It is very important to gain the consent of the bank in advance if you are considering moving a property, either selling or refinancing. As stated above, a bank does not have to agree to the release.

By having only one property with one lender, you have the advantage of paying off the entire loan and keeping the remaining net sale proceeds for yourself.

Borrowing Capacity Limits

Borrowing limits is also something to consider when you have several properties with one lender.

Each lender has different servicing calculation policies when it comes to investment properties, which can result in substantial variations in your borrowing capacity.

They also have differing limits on how many properties you can have with them and the total overall lending they are comfortable with.

By spreading your properties across multiple lenders, you can take advantage of the various lending criteria.

For example, some banks will let you borrow to buy a small apartment, whereas others do not.

Flexibility to choose is key.

Additionally, working closely with a mortgage Adviser will allow you to lean on their experience in dealing with these policies to get the best outcome for your situation.

If one lender says “you’re tapped out” and refuses further borrowing for another investment property, an Adviser can explore other lenders who may offer more favourable terms. This may not be restricted to just interest rates as some non-bank lenders, although charging a higher rate, may approve a loan the bank cannot or may provide up to ten years ‘interest only’ to aid cashflow.

So, there you have it. While cross-collateralisation may seem like a convenient option for securing multiple properties with one lender, it comes with significant risks that can limit your borrowing power and financial flexibility.

By understanding the risks associated with cross-securing properties, you can make informed decisions that protect your assets and maximise your financial potential.

Remember to consider the exposure of your family home, the potential loss of control over sale proceeds, borrowing capacity limits, and vulnerability to one bank’s policies.

If you’d like to know more about ‘The One Bank Trap, ’ just pick up the phone and call

0800 LENDER (536337) or email to [email protected]

About iLender

At iLender we put your best interests first and not the Bank – our advice is unbiased as all Lenders who we do business with pay about the same in commissions.

Although we are Auckland based Mortgage Brokers, we help customers everywhere in New Zealand and overseas with buying property in New Zealand, as we are very much about online and giving advice here and now!

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