By Cam McLellan
In order to mitigate risk, it is smart to avoid cross-collateralising or securing numerous properties with the same bank, particularly when it comes to your own home. We always disclose everything to banks but it is good to have your own home with one bank, your investment property with a totally different bank and then you simply draw down on the equity. Otherwise, if something goes wrong and you default on the loan for your investment, the bank will have access to your family home. This is especially important when you are starting out.
For example, when you purchase a home you pay deposit and costs and have some debt; let’s say this loan was with ANZ. After a while you get some equity and at this stage most people simply go back to ANZ, say they want to buy an investment property and cross secure the home and investment loans. Then ANZ would tick it off and say, “Well done, you have an investment property.”
Obviously the issue with this is cross-securing. If something went wrong with your investment loan, the bank would have access to your primary place of residence. This is unlikely but to mitigate some risk you should instead use the equity to create a line of credit with another bank and use it for deposit and costs. We therefore have two separate loans with two separate banks.
That being said, let’s think about consolidating your debt with single banks, because there gets a certain stage in an investor’s portfolio when you have run out of banks!
I consolidate my investment loans by using a bank for each state. Let’s say I have multiple portfolios with two properties in Melbourne, two in Brisbane and two in Sydney. If all six properties were with one bank I would have a cross-collateralising issue and an issue drawing on equity from one market. If Melbourne was up, Brisbane was rising and Sydney was going backwards a bit, I’d obviously want to release some equity from the moving Melbourne market. If all of my investment loans were with one bank, they would go out and value my entire portfolio. They’ll probably say something like, “Melbourne has had some growth so you have $100,000 of equity there, Brisbane is ticking along and you have $20,000 there but the Sydney market has moved down 15 per cent, so you’re minus $75,000 there.”
Obviously, I couldn’t access the $100,000 and would have been chopped down to $55,000. So instead we group all of the Melbourne properties with bank A, the Brisbane properties with bank B and the Sydney properties with group C. This way, regardless of the market in the other two capital cities, I can access my equity, which allows me to duplicate faster.
Hopefully by this stage your portfolio is reasonably neutral and you’re not too worried about defaulting on a loan or anything like that. When this time comes and you need to consolidate, you can get some pretty good deals from the banks because your business is worth quite a bit to them. You will have moved from being a consumer to a valued customer in the bank’s eyes.
We have to remember though to always keep our own home safe, so whether you are splitting your properties between banks or not, as long as you have control of your primary place of residence you will be on the right track.