Why should you have the relationship with more than one bank?
“Hope for the best, but plan for the worst and you will thrive even when the rain starts”
Scenarios:
1. Your were applying for a mortgage and your your application is denied.
2. You have a large revolving credit facility, but the bank decides it wants to reduce its exposure to risk
3. Your property is damaged by tenants and the insurance payout is disputed; the property remains vacant and you fail to pay the mortgage for three months
And let’s examine what will happen at every single scenario:
Banking with One bank:
- You may be out of options and by trying to apply with other lenders you may not be able to close the transaction on time.
- Your bank can arbitrarily reduce your revolving credit, leaving you in a cashflow crisis
- Your bank can call in the mortgage on that property, and if the property goes to a power of sale and there is still money out-standing, the bank can go after your house, your business and all your other properties.
Dealing with more than one bank:
- Your options proliferate with each bank you deal with; each bank’s criteria is slightly different
- Your bank can reduce your re- volving credit, but you can apply for more credit with your other lenders
- Your bank can call in the mort- gage, and may be able to go after the other one or two properties held there; it has no power to touch your business, your home or any other properties held at different banks.
I believe everyone should have a relationship with at least two banks. The more investment properties you own, the more banks you need to be in bed with. As a general rule and most lenders will allow a million dollars in mortgages with them. Everyone’s situation is different and you will need to tailor your mortgage to your own portfolio.
I don’t deny that it may require the complex set-up and some grinding of teeth and wringing of hands from your accountant, but I’ve seen too many new clients caught in the trap of thinking that their loyalty to a bank will be rewarded with lenience and love when times are tough. Sadly, the op-posite is more likely to happen, banks aren’t interested in loyalty, they’re interested only in numbers.
By having accounts and loans across a range of banks, you have many more options available when problems strike.
Case Study:
Josh and Kathy are happy homeowners who found this out in 2013 when they were halfway through a major construction with subdividing their current lot and building the second home on it.
They had a great strategy: build a house on the back, then sell the new build and use it to reduce the loan on the front house. A-Bank was lending them the money, but luckily, they also had accounts and a relationship with B-Bank. When A-Bank decided that Josh and Kathy couldn’t have any more money to keep funding their build, the couple showed A-Bank the new appraisal on the build, and explained that the bank had funded the project to 90%, so if the project collapsed it was going to be as much A-Bank’s problem as theirs. A-Bank was not keen to give more money to complete the project.
B-Bank, on the other hand, looked at the strategy, the appraisal and the couple’s credit record. They had another rental property at B-Bank and had been reliably servicing the loan for many years. The development fit B-Bank’s lending criteria and B-Bank refinanced the project, and gave Josh and Kathy money to complete the build.
Being in bed with several banks also reduces your exposure to cross-collateralization.
The banks will use each of your properties (starting with your home) to secure all your loans, even if they are in separate legal entities such as trusts or companies rather than your own name.
Rather than each individual mortgage being secured by that specific property, your whole portfolio is secured by your whole portfolio.
This is not advantageous for you, because if something goes wrong with one property, your entire portfolio is at stake as far as the bank is concerned.
The bank can also force you to use the proceeds of a sale of one property to pay down debt against other properties, even if you have other plans for the money.
By splitting your properties across several banks, the whole kit is never on the table when one is sold or vacant.
By playing around on your lender and hopping into bed with two or three other banks, you are positioning yourself to take advantage of all the possible lending options when the rainy days will come. It’s the strategic and sensible way to play the game when times are good, because the good times don’t last forever.
When the storm starts, you’ll have flexibility among the banks, and what might have spelled ‘game over’ just means a change in financing strategies.
