The Ultimate Mini Guide to Property Finance by Cam McLellan

Author:Cam McLellan
Language: eng
Format: epub
ISBN: 9780994268341
Publisher: The Open Corporation

There’s a downside to this.

If, for some reason, you can’t meet Property 2’s repayments, the bank can sell Property 2 and Property 1. This can also give you less flexibility to duplicate later.

Now look at the next diagram to see the advantages of using separate banks while building your portfolio. Each loan stands on its own. By creating a line of credit against Property 1, you can use this as the deposit for Property 2.

This set-up has two main advantages. First, it means neither bank can sell your whole portfolio (though unlikely, this isn’t a risk worth taking). Second, it gives much more flexibility when it’s time to duplicate.

Say you have three properties in different states, and one market goes up. If the same lender finances all three properties, the two properties that haven’t moved dilute your equity.

But if your properties are with separate banks, you needn’t have them all revalued. You just revalue the property that’s gone up and access the additional funds. This process is far more complex when properties are cross-secured against each other.

Once you’ve built a portfolio of 10 properties or more, this becomes less of an issue. When you have several properties in a couple of states, you may wish to group them with one bank and establish a single line of credit.

Similarly, you should never cross-secure your home with your investments. Trust me; the bank will keep trying to sign your home as security. There’s no reason for them to do this, so tell them loud and clear the answer is NO. Use the equity in your home for investment deposits by having a line of credit in place.

Charges & guarantees

Educate yourself about the impact of fixed and floating charges on your companies or trusts and get a good grasp of directors guarantees, especially if a bank plans to secure your home into the loan equation. Have your solicitor review all contracts until you understand them. Quiz your solicitor on the impact of loan contract conditions.

A fixed and floating charge means a bank can appoint someone to sell the assets of a company (or person) if they default on debt payment requirements. The charge ‘floats’ until a default occurs. If the bank exercises the option, the charge crystallises and becomes fixed and the defaulter can no longer deal or trade those assets.

A directors guarantee means the directors of a company have guaranteed a loan, making them personally liable. Banks prefer fixed and floating charges because smart directors never own anything.

Interest rates: fixed or variable?

Banks stack fixed rates in their favour. So I use variable, interest-only loans for my investments. I pay only the interest component of the loan. As I have an exit strategy, I’m comfortable not reducing the principal with standard repayments.

Always compare rates between banks. It’s OK to pay a slightly higher rate if a bank gives you the right structure (e.g. a higher LVR) and doesn’t cross-secure. You can always refinance or renegotiate later (unless, of course, you fix your rate).

If

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