PUTTING YOUR EGGS IN ONE BANK: The Risk of Having all Your Properties Tied Up With One Lender. ??
When it comes to investing in properties, many individuals find themselves faced with a common dilemma: should they secure multiple properties with the same bank or spread their 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 week's update, we will explore the concept of cross-securing properties, commonly known as cross-collateralisation, and the potential risks associated with it.
By understanding these pitfalls, 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. 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. 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.
However, for you the borrower, cross-securing properties can have various negative consequences that should be carefully considered.
1: 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. This puts your most valuable asset at risk and can have devastating consequences for you and your family.
To mitigate this risk, you can leverage your equity without the cross-securitisation structure.
By securing each investment property with different banks, you can protect your family home from being entangled in your investment debt. This ensures that your family home remains separate and unaffected in the event of any financial challenges associated with your investment properties.
2: 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. This can have a substantial impact on your cash flow and overall financial stability.
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.
In such cases, switching to another lender can be challenging if you have had a change in your financial circumstances or there has been a change to the bank's policies. This lack of flexibility can potentially result in significant rate increases, further straining your financial situation.
By diversifying your mortgage portfolio across multiple lenders you can mitigate this risk. In doing so, you can take advantage of competitive interest rates and have the flexibility to switch lenders if necessary, ensuring that you always secure the most favourable terms for your investments.
3: Loss of Control Over Sale Proceeds ??
Another significant drawback of cross-securing properties and one that has caught a lot of clients 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. In this situation, the lender has the authority to determine how much you need to repay, leaving you with little to no control over the net sale proceeds.
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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. This level of control allows you to make informed financial decisions and maximise returns from your property sales.
4: Borrowing Capacity Limits ??
Borrowing capacity limits can be a significant concern when you have multiple properties secured 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 lending they will be 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 for a small apartment where others do not. Flexibility to choose is key.
Also working closely with your 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, your Mortgage Adviser can explore other lenders who may offer more favourable terms.
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 pitfalls 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 interest rate rises.
By working closely with your Mortgage Adviser to diversify your mortgage portfolio across multiple lenders, you can navigate the complex landscape of property investment with confidence and achieve your financial goals.
Reach out if you need a hand to work out the right structure for you!
Cheers,
Stephen
??021 711 444
The opinions expressed in this article should not be taken as financial advice, or a recommendation of any financial product. Stephen Massey and Loan Market shall not be liable or responsible for any information, omissions, or errors present. I recommend seeking professional legal and/or mortgage advice for your own personal situation. My Disclosure Statement is available on my website.