The owner of an Auckland marketing company recently decided to sell an investment property to raise much-needed business funds. The investor had a long relationship with their bank and decided to put the asset on the market to raise some cash. But after finding a buyer and agreeing to an unconditional sale, the investor received a nasty surprise.

The investor was told their bank would be taking all of the proceeds from the sale. The lender said cash was needed to reduce debt on the rest of the investor’s portfolio. The shocked investor was forced to complete the property sale, give the proceeds to the bank, and turn to a second-tier lender for an urgent business loan.

This investor’s story is not uncommon. Mortgage advisers say lenders have become more aggressive with crosscollateralisation. They say banks are recalculating clients’ financial position and asking for funds to pay down debt. Getting a new loan, refinancing a portfolio, and selling an asset has become more difficult, amid ongoing loan-to-value ratio (LVR) restrictions and credit tightening.

Credit conditions have become noticeably tougher over the past few years. Ongoing 60-65% LVR limits for investors, the Responsible Lending Code, and even the Royal Commission into Australia’s financial services industry, have contributed to tighter conditions.

Advisers say banks are placing more scrutiny on customers’ ability to service multiple loans. As such, they believe investors should have different properties with separate banks. Peter Norris, an adviser at Squirrel Mortgages, believes it is a mistake to have your portfolio with a single lender in the current market. He says investors can be “controlled” by their bank if they only have a single source of financing.

He adds: “Being with one bank leaves that bank in control of what happens when you need to top-up or sell. Typically, the client assumes they can sell and get the money because in their mind they have a loan that is attributed to the one property. But the bank looks at it in a different way. The client assumes they can sell but the bank can dictate the amount of money they need to settle.”

Norris says some of his clients have been forced to give up to 100% of sale proceeds to their bank: “Clients have lost the home, can be left with no cash and in a much worse position,” he adds. Norris “strongly” advises using multiple banks to finance a portfolio. “If I’ve got an investor who has one house, I’d advise them to get into split banking, so when they grow they don’t find themselves stuck. If clients come to me and have all of their properties with one bank, we look at restructuring before they go anywhere near buying another house.”

Yet he says customers can be caught out and made to pay down debt on their portfolio even if they spread out their assets between different banks: “There isn’t full transparency across the banks, but when you apply you have to disclose information,” he adds.

Serviceability Issues

Why are banks taking a tougher line? With ongoing LVR restrictions and the threat of further regulation, banks are self-policing, advisers say, and making it more difficult for customers to pass their internal servicing calculators. Even investors with a strong track record have been told their finances are suddenly not strong enough.

Kris Pedersen, of Auckland mortgage adviser Kris Pedersen Mortgages, says servicing is the “biggest issue in the market”. He adds: “There is a lot of talk around LVR, but the biggest change is servicing. It is so much harder. About 95% of my clients are property investors. I have people who could get $3 million of debt 12 months ago and can’t get a dollar now.”

Pedersen says banks are not painting a realistic picture of investors’ financial strength. He says they are testing servicing ability at a significantly higher rate compared to those on offer in the market. He says applications for interestonly facilities, such as revolving credit, have been hit especially hard.

Glenn Stevenson, head of mortgages at ANZ, acknowledges the tighter credit environment, but says aggressive action, such as taking sale proceeds to pay down debt, only happens “at the margin”. He adds: “My experience would suggest these cases have serviceability issues. There may be red flags that suggest reducing debt might put the customer in a better long-term position. When we ask customers to pay down debt, it is mainly because their circumstances change, and their ability to afford ongoing debt obligations might be stressed.”

Stevenson says lenders are generally not looking to take retrospective action against customers: “We are not asking customers to make things fit from an LVR perspective. But it is a different situation if the customer is looking to take on more debt. We can work out the best way to reduce debt levels and re-lend at the new LVR threshold.”

While many investors are looking to split financing, Stevenson believes keeping a portfolio with one bank can be advantageous. He says customers with a strong relationship can access more favourable rates: “It’s about being able to show you’re a good customer and being able to negotiate good pricing. The more the customer has with us, the more we can pass on to them in the way of pricing.”

Taking Action

Should property investors spread their portfolio across several banks? And how can investors with one bank avoid a worst-case scenario of being “controlled”?

Experienced investors say they avoid putting “all of their eggs in one basket” with a single lender. Lisa Dudson, property investor, author and financial adviser based in Auckland, spreads her portfolio across two banks. She says aggressive cross-collateralisation only usually happens with high-risk borrowers.

Dudson says keeping a low LVR and monitoring risk is key: “If you have a high LVR, you are going to be in the bank’s line of sight more than if you had a low LVR. Part of your risk assessment plan is to think, ‘Am I in a high-risk category? And how can I minimise that?’”

‘I was concerned about having my eggs in one basket and losing control if a bank decided to change their rules’ HEATHER BLACK

Dudson says investors should be careful in the current market: “They [banks] want everything they can get their hands on. You have to work harder to make sure the banks don’t take stuff they don’t necessarily need.”

Fellow investor Heather Black, who owns 22 properties, chose to split her assets across several banks when she started her portfolio. She says the move was designed to mitigate risk: “I didn’t have any foresight on LVR restrictions, but I was concerned about having my eggs in one basket and losing control if a bank decided to change their rules. I didn’t want to be in that position,” she adds.

Black says the threat of crosscollateralisation was also behind the decision. She says inexperienced investors underestimate how much control a bank can have over investment decisions: “It is easy for novice investors to not understand credit contracts. There is an awful lot of legalese and small print. A lot of people end up with properties cross-collateralised so they can’t do anything with one property because the others are crossed for security. I wanted to keep my properties separate and go to separate banks.”

For those with a one bank portfolio, keeping lenders informed is important. Norris says investors with a single lender should notify them before making any major investment decisions.

He adds that investors should be proactive to avoid a disappointing outcome: “For the past 18 months, the need for split-banking has been very obvious. If investors are with one bank, they should enquire earlier. They should start having a conversation with their bank before selling, before it is too late.”