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 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.
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.
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 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 an adviser, I have seen that people can be controlled by their banks 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 bank’s policy may say this. It doesn’t mean that you have to offer the banks all of your properties for security; 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.
I 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 I 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 of $1,000,000 and in the meantime, the rules have changed.
The bank reassess 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 a higher value of rentals.
Situations like this are more common than most people think.
As a mortgage adviser I am often contacted by people who have found out that the bank has all their properties tied up together, and this week I have had two separate people with exactly this issue; hence the reason to write this on my finance blog.
