SAY NO TO CROSS SECURING YOUR PROPERTY
Published on December 11, 2015
I’ve been partnering with and assisting investors for about 17 years now and when it comes to finances I have worked out the traps to avoid and strategies that will save you time and money.
Cross securitisation of assets
That’s a fancy term that basically describes the practice where banks tie your assets together so debt on one property is guaranteed / secured by others they hold title over; and vice versa.
Here’s an example of how it works:
- Valued at $500,000
- Your existing mortgage $290,000
- Thus your equity is $210,000
- And your ‘loan to value ratio’ (LVR) is 58%
2.New Investment property
- Valued at $450,000
- Amount required to settle $472,500 (approx. including costs; stamp duty, legal fees & searches and loan costs etc.)
- Thus your equity will be minus $22,500
- And your LVR 105%
One size does not fit all
So when you go to the bank that you have your home loan with and ask for a loan to buy an investment property, this is how their ‘one size fits all’ view will be:
- Combined value of both assets $950,000
- Combined total debt $762,500
- Combined overall equity position $186,000
- Combined overall LVR is 80%
You need a strategy that’s right for you
My strong recommendation is that you do not do this!
At MRD we will shop around among about 40 possible lenders to find the right offering for you and to keep your assets separated with different lenders.
The structural arrangements we put in place are very intentional and specific; and will reflect an individual’s needs - after diagnosis of their unique situation.
Advantages of using your existing bank to finance your investment property purchase
Let me first address the only two advantages of sticking with the one bank:
- Perceived convenience by having your loans with one lender
- The possibility of negotiating a better interest rate
Advantages of using multiple lenders
- Maintaining control. If the worst were to happen and you were unable to maintain two properties you could choose which one to fall behind on. You can be 100% assured that it will not be your family home sold from under you, if it is securing a loan with a completely different bank.
- Lenders mortgage insurance (LMI) premiums are calculated on your debt to the lender, not the property requiring LMI. So, if you have your family home with Westpac and then go back to Westpac seeking a 90% loan to buy an investment property, the LMI premium will be calculated based on Westpac’s total risk / exposure by having you as a borrower. But, the same 90% loan with another lender means the debt on your family home will not play any part in calculating the LMI premium.
- You will not hit a ‘glass ceiling’ as quickly. The way banks calculate your ability to service a loan differs if your existing loans are with them (their exposure) vs. with another lender. For example, you may have an established investment property, tenanted and collecting $450 a week in rent.
If that loan is with the same lender as the one assessing your borrowing capacity, they may only take into account 70% of the rental income; whereas had it been with another lender they will count the whole $450 times 52 weeks as being the annual income.
There are many varying factors that impact the way banks calculate your ability to borrow again. A great broker will know how to find the best fit for you, without resulting in ‘hits’ on your credit file. That is, a great broker will do all the calculating offline and only submit a loan with a lender once they know it will be approved.
Disclaimer to that statement is that lending rules change regularly, especially in recent months since the report into the findings of APRA were released. Thus a loan that serviced today may not service tomorrow if overnight changes are applied.
You probably insure your home, car, income and health.
Spreading your investment loans across multiple lenders may mean you are not offered as much discount off the variable interest rate, but it isn’t (and shouldn’t) be all about rates.
A slightly higher interest rate should be seen as a type of insurance premium that provides you with peace of mind; for all of the above reasons cited already.
The ‘All Monies clause’
You may think your properties, with one lender, are stand alone and not cross collateralised but are you aware of what’s called the ‘All Monies clause’? This is the fine print that says all your assets (even bank accounts) that your lender holds by default secure all your debts with that lender.
So again, separation of lenders is your only real assurance of staying in control.
An unintended consequence of crossing assets
Let’s say you had a home in Sydney that had increased in value in recent years and you wanted to use it to buy your next investment property. However, you also had an investment property in a mining town, that you bought at the peak of the market that was worth significantly less since the end of the mining boom. Both of these properties were crossed by your bank.
By way of an example, instead of having access to 90% of the available equity in your owner occupied Sydney home, you would only have access to the difference between the gains in one and the losses in the other.
At best this will mean you have access to less equity but at worst it may mean you cannot make your next investment at all.
Speak with an expert
Suffice to say for now; MRD has a team of experts who will ensure your finances are structured to give you the greatest opportunity to reach your investment goals. We will help you to stay in control and not relinquish control to a bank.
As we prepare to move into a new year, now is an ideal time to have your finances assessed, structures checked and adjustments made, if necessary.
And to throw a curveball your way… it’s also a great time to consider fixing your interest rates. I’ll give my reasons on why I say that in another newsletter soon.
Contact MRD today by clicking here or calling 1300 883 854 for all your property and finance requirements.
Partnering with you for your investment success.