The pros and cons of using more than one lender

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There was recently a comment from the banking ombudsman that they had seen a lift in complaints from property investors. Specifically, that property investors and banks have a different view on how much debt needs to be repaid when a property is sold.

Investors often make the mistake of assuming that individual loans relate to specific properties. The bank doesn’t see it the same way. As far as they are concerned, loan documents cross-collateralize any new lending against all security held by the bank. Even if you have multiple legal entities the lender will likely put in unlimited guarantees to achieve the same outcome. Whenever you sell a property the lender has the right to review your financial situation and can ask you to repay the full proceeds from the sale. Often investors don’t realize they need to check in with their existing lender ahead of selling a property. At the last minute their lawyer approaches the bank for a discharge and the pressure comes on.

If your financial situation has changed for the worse and you need cash from the sale to cover other debts or to cover an income shortfall, then all of a sudden the bank is in control of this process. Banks genuinely think they are doing the right thing by you even if you don’t think so. Unfortunately it will be some faceless person in Credit, who doesn’t know you, who is conservative by nature, and who is now making decisions that impact on your life.

By having multiple lenders, no one lender controls all of your properties. This gives you flexibility to approach multiple lenders, and to sell properties without the risk that the lender will take all of the sale proceeds. It also makes it easier to leverage equity for a new purchase if one lender has said no.

I recently had to refinance one of a client’s properties because his lender had said no to a $20,000 top up to do maintenance on the property. Having his properties across three banks made that easier. Investors can take this strategy too far and spread themselves across too many lenders.

I had a new client who had one property with each of five different banks. Not only is that administratively difficult but she wasn’t getting good pricing because each bank only had a small loan. We helped her get one of her properties debt-free, consolidated her lending across three banks, and got her better pricing. Having a property debt-free and unencumbered is the best insurance policy. It also doesn’t need to be your owner-occupied house. Often your house will be worth too much and so difficult to get debt-free. It will be easier to get an apartment or a low value rental debt-free.