Investor Mistakes: If I can find my own properties, I can do my own mortgages!
Updated: Oct 7, 2019
If I can find my own properties, I can do my own mortgages!
By Dave Windler
Disclaimer: Nothing is this article is meant to constitute financial advice of any kind, and is the opinion of the author only. Seek professional advice before making any financial decision.
Stuff It Up Strategy
It all started when you went direct to your bank for your first home loan. You bank with the Red Bank so you go see the Red Bank, and the Red Bank gives you a Red Bank mortgage, based on their calculations on how much you could borrow at rates that they are currently offering.
The Blue Bank might have been able to lend you more, the Yellow Bank might have been able to give you a better rate, but Your Bank is Your Bank and of course having banked with them for years they will look after you. Red Bank all the way!
After a while, your incomes go up a bit, and the equity in your home increases and you decide to take that first step into property investing. Time to go back to the Red Bank.
Red Bank approves you for $500,000. You don’t know that Blue Bank would have given you $550,000, or Yellow Bank $600,000, as Red Bank gets the job done. Red Bank all the way!
And let’s say some further time passes and this repeats itself one more time. Red Bank supports you one more time, one more rental investment purchase…. job done, happy days.
The Problem (s)
What problem? You wanted to get into property investment, and Your Bank did a great job. They got you into your first home, your first investment property and then your second. They did what you asked them to do. No problem……. maybe.
Let me be clear here. It could be Red, Blue, Green, Yellow or any other colour you choose Bank. You might have a problem or at least might have been better off exploring your options. You only know what you know and whatever colour bank you visit they can only help you within the confines of their terms at that time, and who knows all of that stuff??
Mortgage Advisers do!
Having just celebrated 13 years as a mortgage adviser, I would have thought that by now more of the borrowing New Zealand populace would have realised that, not only do mortgage advisers/brokers exist but that they offer their experience and advise for free.
Yes, you get to sit down with my 13 years in the industry, explain your situation, outline what you want to do and have me go and spend time finding the best solution in the marketplace and I won’t send you an invoice for my time!
So what problems might we mortgage advisers avoid?
1.) Borrowing power – before you get to choose your interest rate and loan structure, banks test your ability to borrow using a test rate or servicing rate which is much higher than the rate you’ll get. The calculation tests your ability to borrow under tougher times when rates might be higher.
The main point here is that every bank’s test rate can be different as can many other aspects of the calculation. I would be 100% certain if each reader here tested their ability to borrow with six different coloured banks, they would get an approval for six different amounts.
What’s the problem?
Well what if you could have borrowed a little bit more for that first home, that first rental, that second rental? Would it have put you into a different location or a different price bracket, with a better yield or an ability to add better value or subdivide? What difference might your choice of bank make to your net worth over, 5, 10- or 15-years’ worth of owning assets worth less than what you could have purchased if you had chosen a different bank.
What if a different coloured bank allows you to buy one more income producing asset than Your Bank allows you to?
2.) Rate – banks all have advertised rates. Carded rates and special rates. Of course, you go to any number of comparison sites and pick the best. But is it the best? Is it actually the best rate you could have got if you had the time to go round all the banks and even more so, is it the best rate for your situation? Should you really go for that two year special or is the three year special a better decision for your circumstances?
What’s the problem?
Well the more you borrow the more it costs in interest and if you are off market by 0.1 or 0.2% every time you borrow and every time you re-fix, what might be the potential cost of that? Maybe not too much, maybe a little more if you do the maths over 10 or 15 years.
The cost can be more significant if you fix for too long and rates drop or too short and rates go up. Whilst all the crystal balls are broken, and no adviser will ever predict future rates with certainty, a sounding board for rate choices and a deliberation with an experienced adviser would surely lessen the chances of a costly mistake?
3.) Risk – yes, every time you take out a mortgage you are increasing your risk position. Every time you take out a mortgage with the same bank you are increasing your risk position further.
What’s the problem?
When Your Bank gives you a home loan to purchase your first home, it takes a mortgage over that property. It gives the bank the right to take the property and sell it should things go very, very wrong. Then let’s say it does the same for your first rental (gives you a home loan and takes a mortgage), they link the two properties together with what’s called a cross guarantee.
The debt over the rental property is now linked to the home as the bank has security over both. Your home is now exposed to the rental debt and should things go wrong with the rental the bank can theoretically take its pick over what it can take to mortgagee sale. That to me is a problem.
Imagine the scale of the potential problem if you have your home and 2, 3 or 4 rentals, all with the same bank?
4.) The Exit – Once you’re in a situation where you have multiple properties with one lender, getting out of that situation gets more complicated than one thinks. At some point, multiple property owners will exit out of their mortgage debt by selling down, for others life events occur and sale of a property becomes a necessity, sometime under duress or time pressure.
Historically it was fairly simple. The property has a sale price, there’s some real estate commission to net off, one or two other costs to factor in and the bank would allow you to retain enough lending over the remaining properties (remember you allowed them to take mortgage over the lot!) to be covered by the value of those properties. In simple terms as long as the bank calculated they had enough security after the sale you could keep the remaining proceeds of the sale.
Not now. Not only will the banks make sure they have enough security, but they will also check you can afford the amount of lending you want to keep in place. Many will request a full application with all the supporting paperwork, just like you had to, to put the loan in place in the first place. They potential therefore can request you pay the full proceeds of the loan….and that cash you expected to get from the sale……gone!
The Alternative (the get it right strategy)
For rule #1 for property investors is to ‘split bank’. The moment you have two properties under ownership is the moment you also have two banks. Rule #2, by the way, is to re-read rule #1.
How do we do this?
Remember when you went back to the Red Bank for that loan to buy your first property? Well, you can still do that. Red Bank after all is where your current home is, and Red Bank is a good bank. All you need to do, instead of asking them for 100% of your intended purchase price, is to get them to approve you 30% of it!
Under the current LVR rules, we have to have a 30% deposit to purchase an investment property through a bank, so that’s all we need Red Bank for. We then need a Blue, Yellow, Green or whatever colour bank to give us the 70% and we have what we need. Red Bank has the mortgage over our home already and the new colour bank takes the mortgage over what we purchase…. job done, both the securities and therefore the banks are ‘split’.
There’s a knack to doing this successfully, and good advisers who specialise in property investment, will do this for you in their sleep.
Firstly, we always tell each bank what we are up to. Red Bank has to know that we are borrowing 70% from another colour bank, and that bank must know where the deposit is coming from. It means that the income maths must now work for two banks, not just one. This is now where using an adviser can start to work in your favour. It’s at this very first stage where the smart adviser is not only picking the right two banks, they are also selecting which one stays over the home and which one gets the first rental.
This initial move to split bank alleviates potential problems 3 and 4, (Risk and Exit). Which bank is best over home or over the rental needs to take care of potential problems 1 and 2, (Borrowing Power and Rate).
These two banks need to give us what we need to borrow under the most competitive market terms we can get. And have no doubt Borrowing Power comes first. There’s no point in getting a great interest rate from a bank that won’t approve what you need!
In conclusion, I have a confession to make. I am the worst DIYer that I know. If there’s anything needing to be done around home, I fear doing it so badly that I’ll make things worse. Therefore, I don’t attempt it. The consequence of course is that I have to pay to get the job done.
Best thing about fearing you’ll choose the wrong colour bank to implement your ‘get it right strategy’, is that mortgage advisers will be happy to do it for free.
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