Multi Property Finance problem

Hi everyone, Im new to the forum... hoping someone can shed some light as I've hit a brick wall. I have 4 properties with one of the major banks and want to buy another IP. I have been knocked back for finance which to me is a bit of an insult really, I've got a solid income plenty of equity and they say I have reached my maximum borrowing. They are telling me that if I want to buy again I need to sell which just doesn't add up. I hear of people who build large portfolios i.e. 10 - 20 properties plus and my question is how in hell do they do that. I spoke with a mate of mine who tells me its the way they secured the loans against the properties, can anyone offer me any advise on this?
All the best
Mike

Hi Mike, good topic and one that will affect anyone building a portfolio. Basically what has happened in your case is the bank has cross secured or cross collateralised (same thing) your loans in order to give the lender more security and control over your properties. Worst case if you default on one of your loans they can sell out from under you and of course it has stifled the growth of your portfolio.

Sad thing is I see many brokers .. even brokers who have been in the game for years structuring like this for investment properties, and even including a PPOR into the equation risking everything. It limits your potential to grow and is very costly to re-structure as you need to pull properties away from the structure and refinance as stand alone. Then of course there are potential exit fees and partial release issues and costs involved if you want to move forward.

There are a few factors that limit your borrowing in a case like this. 1: Overall maximum LVR is lowered, 2: The assessment rate to which they calculate borrowing capacity is now spread over the entire portfolio. If it were a stand alone security the assessment rate is applied to the loans directly related to the top-up and purchase. Thats another thing, if it were set up as stand alone a refi and associated costs may not be necessary as you could top-up an existing loan facility for cash out to cover costs related to the next purchase. 3: The lender also has a max debt level (ceiling) and once you reach that debt limit with them thats the end of the road.

You would need to have your situation properly analysed, but providing you service and you have enough equity, my suggestion is to refinance one of the properties as stand alone security with another lender, do 2 splits in the loan for the refi, one to payout existing mortgage owed and a 2nd split for the cash out component to cover deposit and costs in purchase of your next investment property. You wont need any fancy bells and whistles like LOC or Offset accounts in my opinion, they cost and a cheaper option would be a basic variable loan with redraw facility, that will do the job with internet banking access and all.

Then for the purchase, again stand alone security, and basic variable loan.. do them both with the same new lender perhaps.. but dont be afraid to diversify lenders..

Theres alot of issues to consider when financing a portfolio and especially if you are planning to keep growing i.e... how you structure loans with a lender/lenders, what type of lenders you place loans with , are they deposit book lenders or securitised, do they have in house LMI (mortgage insurance) or is LMI outsourced and you need to keep tabs on your debt with mortgage insurers as well.. once your portfolio gets to a considerable size all this will be an issue. Keep a spreadsheet with all these details.

Anyway I could go on forever, later on down the track you would tackle the other cross secured properties and slowly pull them way and restructure.

I hope this helps. Good luck with it all.

Regards
Tony Born
Ph: 0407 617 141
Email: tony@wealthwithproperty.net
Ask me about a free Property Investor Toolkit.

Mike,
            I am in EXACTLY the same predicament.  Hindsight is a wonderful thing but I wish I had of structured my portfolio differently in the past and used a GOOD broker from scratch.

You need to break up your portfolio by spreading the debt \ risk between a few different lenders. 

For an example (hopefully in laymans terms) if you have 1 million with one lender and you go under that lender looses out (technically \ so to speak) 1 million dollars.  If you had that 1 million spread between 3 lenders 330k each and you went under each lender would (technically) loose out 330K.  So one lender would not be loosing a massive amount of cash just a portion as such the risk for each lender isn't as great.

If the lenders risk is minimised you are able to borrow more pending your income \ LVR etc.  If you had 8 properties you may like to have 2 per lender or somthing to that degree.  It does seem odd due to no figures really change in the amount you owe \ servicablity etc but thats how it works.

There are some brokers with fantastic information on this forum who can provide alot more advice. 

Mike,

How much equity do you have (i.e. what is the LVR)
and how much salary income (apart from the rental income)?

I still prefer the Offset account for the PPOR eventhough it has slightly higher interest rates 0.06%-0.1% (ANZ Simplicity vs. ANZ breakfree package for example)
but it is much easier if you convert PPOR into IP in the future.

I made similar mistake intially just to chase the cheaper interest rates.... and end up costing more to restructure the finance again..

Some of the brokers here are very uptodate with the structuring issue

Hi Mike
I noticed Tony's comment up there, he is absolutely spot on.. Ive got 7 properties and now buying #8 and you need a broker who knows what hes doing. I can tell you 100% for sure that bank employees are pressured to not only set up lending structures to give the banks more security but also to sell you all the extra features they can. The banks are out there to make money and protect themselves, and thats all there is to it. Cheers Steve

Hi Mike

Hate to say it is a comment i get from new clients at least once or twice a week that their own Bank have said NO and it all boils down to how the loan has been structured in the first place.

I have written many an aricle on cross collateralising so wont repeat them here same to say that as GOM mentioned if set up properly you always have options however if set up incorrectly you end up boxing yourself into a corner with limited ways out. 

Course it is difficult to comment on your position (And the same for Fredo) without all of the information to hand but there isnt too many clients we deal with where we are unable to do anything.

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Thinking of buying your next investment property using a SMSF. Email me for a copy of my SMSF EBook.

I just had a client this week whose bank (starting with a H) said he couldn't even afford what he had now, let alone getting another 1. Took him to another bank and he is able to borrow another $600,000 on top of what he already has.

Terryw
Finance Broker
Solicitor

Mike your secenario is very similar to mine but thankfully  3 of my IP's are stand alone so accessing the equity won't be too difficult. I have realized that i have got to a point that I need professional assistance ie Finance broker to move forward.
heed the advice from the gurus in richard , terry et al.
Chris

Like a doctor needs to see patients before they are sick to keep them healthy, brokers ideally need to see clients before they max out. This can help longevity!

Terryw
Finance Broker
Solicitor

Is Tony saying his own comments are spot on? Why has he signed it 'Steve'?

Hi Steve,

I feel your pain! I've just had to sell a commercial property to free up funds.

You could also form a trust and then approach another bank, as the new bank will view your debt differently to your current one.

My new broker is very good with structure so if you want some advice he'd probably be happy to talk to you.

Dean

Does anyone a good broker they could recommend in Perth?

Yes please!!  very frustrated in trying to grow portfolio.

Hi Kkatlea,

I know a mortage innovator who is very good. Great knowledge and lot's of experience with helping investors. He writes loans for the Comm bank and is good at getting stuff across the line.

If you want his details just shoot me an email at dean.potter1@gmail.com and I'll pass them.

Good luck!

Dean

A mortgage innovator!!!

What is a mortgage innovator? Someone who innovates mortgages I guess, but what does this mean?

Terryw
Finance Broker
Solicitor

There are a few factors that limit your borrowing in a case like this. 1: Overall maximum LVR is lowered, 2: The assessment rate to which they calculate borrowing capacity is now spread over the entire portfolio. If it were a stand alone security the assessment rate is applied to the loans directly related to the top-up and purchase. Thats another thing, if it were set up as stand alone a refi and associated costs may not be necessary as you could top-up an existing loan facility for cash out to cover costs related to the next purchase. 3: The lender also has a max debt level (ceiling) and once you reach that debt limit with them thats the end of the road.

Mortgage Innovator is a CBA Mobile Lender effectively. They onlys ell CBA products and work on commission only :)

Spiro Kolokithas - What If We Finance Tel: 03 8804 1354
www.melbournemortgage.com.au
see the possibilities...

So does that mean the guy (mortgage innovator) in Perth who is good only writes loans for the CBA, while the advice on the post is to try to setup your portfolio with at least a range of lenders?

I am starting at the very beginning just buying my first place shortly hopefully, and once i have some equity will be looking for my next place, but sounds like its best to get started on the right track in the first place, so while this CBA lender may be one option, again does anyone know any other good alternative brokers in Perth?

I'm also in the same situation but I only have 3 properties and two banks.  I finding it hard to believe it is just the structure. I think I'm on a relatively low income and that is my main problem.  I am going to attempt to refinance but would like to hear any suggestions or comments on my situation.

My rough details are:

Bank 1 Loan 1 - 250k (equity maybe 65k)
Bank 1 Loan 2 - 330k (equity maybe 50k)
Bank 2 Loan 3 - 330k (equity maybe 40k)

*equity based on real estate sales and I know will not be bank valuations

Income 1 - 45k
Income 2 - 65k
Rent 1 - 15k
Rent 2 - 15k

I've been told by both banks that I won't be able to service the loans, do you guys agree or perhaps some magic can be pulled out from a hat?

Pcuser

When you say equity is that actual or useable equity.

Does that take your loan to 80% or 90% of the current value as there is a big difference.

There are quiet a few variable to be able to answer your question but that is a good starting point.

Richard Taylor - richard@tayloredfinancialsolutions.com.au Tel: 07 3720 1888
Residential Mortgage Broker providing structured home loan advice for investors and owner occupiers all over Australia.
Thinking of buying your next investment property using a SMSF. Email me for a copy of my SMSF EBook.