Finance options

[Frezzinghot]

Question:

As investors we often talk about the one bank trap. Keeping IP loans seperate from PPOR loans. BUT if you could get MORE finance (for IPs) by bringing all the loans together with one bank should you do it.

Reason is I have been offered higher lending to go with one of my banks, downside is I would have to pay back break fees which I think could be quite high, although on refinancing I would also be on a lower rate with the new lending.

Anyone see the downsides of this? Apart from being a one man bank trap? Goal is to buy another rental but current offer is a little tight especially since my patch is Auckland.

Thoughts?

[Don't believe the Hype]

The one bank trap you refer to is is more to do with cross collateralize security. The bank will secure your new loan against all held properties... this only really becomes a problem when you go to sell a property and the bank decides how much of the proceeds you can keep to use for things other than paying down debt.

I.e. if you have 10 properties with $1m debt total on properties worth $1.5m - you decide to sell one to fund a new boat/car/holiday etc... you sell one for $150k the bank could keep the full $150k and reduce your debt to $850k on the remaining 9 properties.

This is amplified in a downturn if you need some quick cash for something - if you have each investment a separate banks you sell one place for $150k repay the $100k debt at that bank and keep the $50k for whatever you need it for... keeping 9 properties - if all funds at one bank you might need to sell a number of properties to get to the banks required debt levels before you free up to cash you needed.

[brokerman]

Agree with the above, there is a lot of hype around 'one bank trap'. If your bank allows you to do what you want to do and it works then go for it.

[Anthonyacat]

The one bank trap you refer to is is more to do with cross collateralize security. The bank will secure your new loan against all held properties... this only really becomes a problem when you go to sell a property and the bank decides how much of the proceeds you can keep to use for things other than paying down debt.

I.e. if you have 10 properties with $1m debt total on properties worth $1.5m - you decide to sell one to fund a new boat/car/holiday etc... you sell one for $150k the bank could keep the full $150k and reduce your debt to $850k on the remaining 9 properties.

This is amplified in a downturn if you need some quick cash for something - if you have each investment a separate banks you sell one place for $150k repay the $100k debt at that bank and keep the $50k for whatever you need it for... keeping 9 properties - if all funds at one bank you might need to sell a number of properties to get to the banks required debt levels before you free up to cash you needed.

Just adding to this - even if you don't think you're going to sell, keep in mind that things change. I sold a property that I'd bought intending to keep forever. It settled a week after my son was born. As a result, ANZ assessed us on my own part time income and my wife earning nothing on maternity leave. They took the full balance to pay down the debt on the other property (down from a 60% LVR to a 25% LVR). It was ridiculous and unfair and I still haven't forgiven ANZ, and I took away their remaining security as soon as I had the opportunity to.

But I'd go back to them if they gave the deal I needed when no one else would.

[Frezzinghot]

Just adding to this - even if you don't think you're going to sell, keep in mind that things change. I sold a property that I'd bought intending to keep forever. It settled a week after my son was born. As a result, ANZ assessed us on my own part time income and my wife earning nothing on maternity leave. They took the full balance to pay down the debt on the other property (down from a 60% LVR to a 25% LVR). It was ridiculous and unfair and I still haven't forgiven ANZ, and I took away their remaining security as soon as I had the opportunity to.

But I'd go back to them if they gave the deal I needed when no one else would.

My intention is to hold all new property, so are you saying you would do it??

[Anthonyacat]

My intention is to hold all new property, so are you saying you would do it??

Absolutely, if it's the best way to get what you want done. You can always refinance one or more properties away from the bank in a couple years.

[Frezzinghot]

Absolutely, if it's the best way to get what you want done. You can always refinance one or more properties away from the bank in a couple years.

Cheers thanks

[Frezzinghot]

Ive just been offered 600k to buy my next IP. All lending will now be with one bank,(not selling any assets) cost of doing this will be break fees on our current bank but we think by having more funds we will be able to buy a much better investment and allow us to look at property with a lot more upside.

So we will probably take up the offer to move forward!

FH