INVESTMENT LOANS & COMMON ISSUES

Incorrectly structured loans
We have all heard the age old advice “don’t put all your eggs in the one basket”. Unfortunately investors often do exactly that by cross collateralising and having all loans & properties tied together with the one lender. It seems so easy and simple to set up your loans this way, but it can stop further property investment plans and also puts you at massive risk if things go wrong. Whilst having all your loans with the one lender may seem convenient, the lender has all the power and control, and you are essentially at the mercy of their policies, products and valuations. The real risk appears when things go wrong (divorce, loss of job, illness, etc) and you need to convert equity to cash by selling one or more properties while you recover. It is not uncommon for lenders to take 100% of net sale proceeds from a property sale, in order to reduce the remaining loans of a borrower. This helps reduce the lenders risk but can increase the borrower’s hardship. Cross collateralisation is setting your properties up for the domino effect, if one falls… they all fall. If you can keep properties and loans separate as stand-alone facilities, this can provide greater protection and flexibility.

Diffculty accessing equity
Often property investors are held back by their lenders, and may not be allowed to access their equity to keep investing. If your loans are tied together via cross collateralisation, lenders can refuse further borrowings for a number of reasons:
Your overall LVR is too high, Your total debt level is too high, You may be unable to afford more on their servicing calculator.

You may be considered over reliant on rental income, You may be affected by higher interest rates added to your existing loans.
Each lender has their own restrictions on the amount of debt to value ratio they can lend and the maximum amount of debt exposure they can hold for any one client. As a general rule of thumb, property investors who have or are planning to build large portfolios, should have a maximum of $1,000,000 in loans with any one particular lender. Don’t let yourself be boxed in by one opinion, we have so many lenders on offer with a variety of capabilities, there are always options out there.

Failing lender servicing
This is an increasingly common issue property investor’s face. With ASIC restricting lender investor growth to only 10%, lenders have consequently clamped down and tightened servicing requirements. Responsible lending requirements mean lenders have to be conservative in what they deem to be an acceptable level of debt for any borrower. There must be a contingency buffer in the event that interest rates rise, living costs increase, or situations change. Lender’s servicing models add a buffer here and a reduction there at every turn. So in the end, a neutrally geared portfolio can be deemed to be a high debt load. However, we have some lenders who will:

Allow gearing benefits to be used; Use a higher percentage of the rental income; Assess debts with other lenders at the actual repayment rather than adding a buffer to the interest rate, or; Who will not calculate repayments on a principal and interest basis when the loans are interest only.

While we don’t encourage extending yourself to the maximum, we can help set you up with the lenders whose policies are most accommodating for your needs. There is a massive gap between how much one lender will lend and how much another one will. Generally, the more property investments you have, the greater the difference can be.

Complex loan structures

Investors using other vehicles to purchase property can often have trouble obtaining finance. Loans in the names of companies, family trusts, unit trusts, hybrid trusts, SMSF trusts and property investment trusts, can all cause immense frustration and complications depending on the lender chosen. When possible before you choose a complex structure make sure you have explored the lending options first. While these structures seem like a good idea, there is little point having these structures if they will restrict you from borrowing further.