Borrow from one bank or multiple banks?

1st May 2011 | By: Dave Smyth

The global financial crisis has had some punishing flow-on effects for property investors in New Zealand. Banks that only a few years before had been only too happy to lend at 100% finance on property after property reassessed their exposure to a market that now looked highly risky to them.

Landlords struggled as the economy tightened and unemployment rose. The high levels of lending that had previously been justified by year on year, double-digit capital gains suddenly felt like a millstone for those investors who hadn’t prepared for a downturn.

The most vulnerable were those who had focussed on that capital gain to the detriment of cashflow and suddenly found themselves with a negatively geared property that was worth less than they had paid for it. These were among the first investors to feel the chill wind of change from their lenders!

If you’ve never had any problems with banks or believe that if you always pay your mortgages, you will be ok, don’t be so sure. I know many investors whose relationships with their lenders suddenly turned sour even though they had strong cashflow and had not missed any mortgage payments. Some were shocked to learn that their mortgages could be called in at any time even though they had long term fixed rate agreements!

A policy change at the bank is all it takes to alter your mortgage manager’s decision on their lending on your properties. Try going from 100% lending to 70% lending overnight. On a $300,000 property, that could mean a call from the bank asking you to please come up with an extra $90,000 to fit their revised criteria! This really happens and at it’s worst, lending was reduced to 50% on apartments in Auckland by some banks.

This isn’t just scare-mongering. It’s really the purpose of this article. Things do go wrong; with banks, with tenants, or your own personal income. If you hold all your mortgages with one bank, a sudden change could affect your entire property portfolio and put your own home under the spotlight. Split your debt levels among multiple banks and the risk is reduced.

In February 2007, I sat down and took a serious look at my own investments. The property market had been booming for the last 6 years and I could see that we were overdue for a major correction that would have wide-ranging effects. I considered options for exiting the market entirely but considering that the options I looked at were commercial property or finance companies, I probably made the right decision in saying my course!

What I did do was review my borrowing and split my debt levels between four banks to remain under their commercial lending levels. Once you are bumped up to commercial lenders, the scrutiny is much greater. I also kept my overall borrowing to only around 50% of my portfolio’s value. This would set me apart from the majority of other property investors who were more highly geared and also meant I had much better cashflow as the properties were mostly positive cashflow from time of purchase.

I also convinced one bank to remove a property from being used as collateral. This meant that if the worst happened, I should have more than enough equity to be able to have a fire sale and still walk away with cash and have one property that the banks could not get their hands on. I strongly doubt that I would have been able to do this after the global financial meltdown.

I didn’t want to be one of the many investors that were so focussed on growing that they forgot to protect what they already had. Banks will try and hold as much collateral as they can and if it comes to recovering their lending, they don’t care how cheaply the collateral goes for as long as the mortgage is covered.

There are down-sides to using multiple banks. It does mean you have to manage multiple relationships, deal with multiple lending policies, accounts, payments and reviews. It can also make it more difficult to get the best discounts available and balance equity most efficiently. However, I strongly believe that diversifying your lending is an essential practice in minimising risk in a downturn or in an unexpected financial crisis. Like all insurance, it only works if you do it before the event!

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