Incorrect Loan Structuring..
Cross securitisation and the banks hidden agenda that can grind your Investing to a halt....
A couple running a successful business and Property portfolio were flabbergasted to find that they couldnít borrow any more money to expand their portfolio when they fronted at their bank, even though their overall portfolio was low geared.
They wanted to buy a block of land on a long settlement with the intention of doing a small development. They intended to use the equity that they had achieved in their portfolio of 4 residential properties as the deposit for this project understanding that they may need more funds upfront than a standard residential purchase due to the nature and size of the project.
Building a portfolio including 4 investment properties and your own home is a commendable achievement and will have you heading for financial freedom if your loans are structured correctly, but loan contracts with subtle securitisation clauses meant that this couple couldn't access the equity they thought they had available to them.
The bank held their 4 investment properties as security for each of the loans they had taken out over the years when they purchased the properties. Now they had accumulated more than enough equity to use as a substantial deposit for their next investment project or so they thought. When they explained to the bank their intention of drawing down extra equity the bank refused to offer them the funds required for the project based on the fact that it was something that required a higher deposit due to its location and nature. The only way they would consider it was if they included the land and refinanced the finished properties into the pool of securities the bank held.
This would have meant the bank held all properties as security over the loans even though they could have released 2 properties that would then have been totally unencumbered.
Luckily for this couple, they decided to seek advice elsewhere (guess where they went) and were able to organize a completely new financing structure that enabled them to separate their properties and continue investing with the freedom and flexibility gained from correctly structuring their portfolio.
The bank's main concern and agenda was to hold as much security as possible thereby minimizing their risk (to the bank), and the question of whether they have the clientís best interests at hand could be well argued.
As an aside issue to this example, the bank also did not disclose to these clients that the approval for the purchase of the land would expire before the term of the contract being 12 months. This wasnít an issue to the Bank because it had no risk as they held the clients other security properties that had more than enough equity to cover the settlement. However this was a major risk to the client, and could have risked non performance of the contract and penalties.
Moral of the story is if you are hoping to build a property portfolio, talk to a finance strategist not a broker or bank employee. Anyone can do a 2 day broker cert IV course and call themselves a mortgage broker. Keep in mind the main target audience for brokers is 75% of the market which are home buyers or mum and dad investors, and the focus is only on getting a low interest rate. This clearly is a major problem if you are an investor looking at growing a property portfolio.
Broker's great idea turns into home owner and budding Investor's nightmare.....
The mortgage broker of a couple who had recently purchased a home wanted to assist them to purchase a motor vehicle by refinancing their home. This seemed like a good idea at the time and was a recommendation by the client's accountant for tax purposes.
The plan was to go back to the lender and apply for an increase to the existing loan. However the broker thought he would go one better and change the loan from the initial structure to a different structure which would save the client interest and provide a better product. Or so he thought!!
The client applied for the loan under the new structure, however with the increase in the loan amount and other commitments, the client could not qualify for the loan. No problem thought the broker, we will just go back to the existing loan structure and apply under those terms.
The lender came back and said sorry we can't do that because the terms and details of the applicant have now changed, and he no longer meets the criteria for that loan either, and the big shock was that the lender then demanded the loan to be paid out within 30 days.
Imagine how the client felt when not only was he missing out on his new car but he now had to sell his home that he had just spent the last 6 months lovingly restoring and expected to stay in for many years to come. The broker came up with a hasty solution which was a refinance with another lender under expensive terms and conditions which would have ended up costing the client thousands more over the life of the loan.
Just in time, the client sought the services of an experienced finance strategist who came up with a solution which enabled the client to refinance the home loan, access funds for the motor vehicle and have excess funds set aside and available to commence an investing strategy which the client had been planning on undertaking with the increased equity created form the restoration of his home. All in all a great result which could have very well been a disaster!
Moral of the story... make sure that you are seeking finance through experienced professionals, who are investors themselves, and who really understand how the finance industry works. It is so important to take in the bigger picture and not just the immediate needs. The Banks and an inexperienced Broker could have easily turned this persons dream into a nightmare.
Investor forced to sell and unable to grow his portfolio....
A new client came to us recently with the issue that his bank had forced him to sell a property to be able to access funds to buy another. Basicaly, his borrowing capacity had reached its limit under the current loan structure.
This client was funded by one of the major banks who crossed securitized his entire portfolio. He thought it was a great idea in the beginning as it lowered his LVR (loan to value ratio) enabelling him to quickly buy more property but after 3 properties the bank told him that he could not borrow any more money.
This is a common scenario that we see time and time again. The banks want to gain as much security and control as possible... with detrimental effects for the investor.
The investor came to us and of course we restructured his loans, freeing him up to basically expand as much as he wants. He didnt need to sell, and he is now buying his next investment property.
Amazing things can be achieved, one of our clients has bought 24 properties in the last 5 years.
