Lender loyalty or debt diversity? How to finance a large portfolio
Following another official interest rate cut this month, by the RBA, many investors are hoping to capitalise on improved finance conditions. For those striving to move beyond five + properties, which is the better option; remain loyal to one bank or spread your loans across multiple lenders?
Over the past few months, we have seen an improved lending environment in Australia following APRA's serviceability changes and three interest rate cuts by the Reserve Bank of Australia.
Investors looking to capitalise on these current conditions by continuing to add to their portfolios should consider their finance options carefully. For those striving to move beyond five + properties, should you remain loyal to one lender or can spreading your loans across multiple lenders be a better option?
When building a large portfolio, one strategy investors commonly incorporate is adding value to a property through renovation or development before flipping it for profit. The profit can then be used as a deposit towards their next investment. This strategy allows investors to manufacture equality over a short period of time rather than waiting to pay down debt or for capital growth to occur, consequently fast-tracking their portfolio creation journey.
Investors who choose to cross-collateralize [have all of their loans with the one bank] when adopting a value-add to flip strategy can come unstuck.
Group Executive, Financial Services at Canstar, Steve Mickenbecker suggests that "over time property investors have preferred not to cross-collateralize. They have this preference because if they want to trade their portfolio in some way or another, sell a property that they've already got financed, then they want to be able to control what happens to the funds."
"But if you have one loan, one property, you're in a position to say, ‘I've now raised $150,000 for the sale of this property, I can do with it as I will.’ And that might mean using it as a deposit for the next property.
"If you stick with the same lender for your next purchase, the bank might say, ‘Ah, we're trying to strengthen our security position and we'll take 50,000 of that 150,000 and use it to reduce your exposure against your total securities.’" said Mr. Mickenbecker.
According to Multipart Finance director, Tim Russell spreading your loans across multiple lenders can also increase your potential borrowing capacity.
"Different lenders have different policy but more importantly, they also have different serviceability hurdles regarding their borrowing capacity metrics.
Some banks will have an assessment rate at 8%, while others will accept actual repayments for other loans. As such, by using multiple lenders you have the opportunity to extend your borrowing capacity far beyond staying with just the one lender."
In addition, diversifying your mortgages is a great way to minimize risk.
"Having a spread of multiple lenders across your property portfolio allows you to keep them all on a ‘need to know basis.’ For instance, if you got into cashflow issues and were falling behind in repayments for one of your properties, only the bank that has security over it would be aware of this.
"If all your loans were with the same bank, there would be concern from the lender over all of your loans, making it hard to renegotiate with them." said Mr. Russell.
For those investors looking to increase their asset base, Mr. Mickenbecker offers the following advice:
"Obviously there's all the due diligence that they already do[and] investors with three + properties are pretty well placed to understand this.
"The other piece of advice is not to feel that you are in any way bound to one existing lender. And whether you cross-collateralize or whether you want to go loan by loan, the fact is that there are some great deals out there.
"You'd be crazy not to treat this second opportunity that it is arising because you're investing in another property as a trigger to review the whole package of funding you've got.
"Chances are, you borrowed for some of those properties three, four, five years back and there would be better deals around today than the deal you're on now."
Having built an impressive portfolio of 10 properties in just five short years, young investor Tim Lewinski is adamant that he would not have achieved this success had he stuck with his initial bank.
What have been the benefits of spreading your loans across multiple lenders?
As most banks have different risk criteria and different ways of calculating serviceability - it has given me greater flexibility to borrow more money and leverage by extracting equity to use for other purchases.
Do you think you would have been able to build your portfolio at such a rate using the one lender?
No, definitely not. The reason I have been able to build my portfolio is that my risk is spread across numerous lenders. Looking back, my limit with one lender was about $1.5 million, but this dramatically decreased leading up to the time of the Royal Commission and throughout.
The past two years have been a particularly challenging time for investors due to tough lending conditions? How is it that you have thrived in this environment?
Things did slow down for a while and I had to think of different strategies to try and work out how to lend more money for growth assets.
To increase my cashflow and improve my serviceability standing with prospective lenders, I reviewed the market and when it came to renewing each lease, I was able to increase rents across my portfolio which helped.
Also, having initially dealt with the big 4 banks it was time to look elsewhere.
Luckily, I connected with an investment savvy broker who was able to introduce me to new lenders that had a greater focus on lending for property investment. This really helped me out at a point when I thought I couldn't borrow any more.
What is your best advice for other investors hoping to emulate your success?
The most important thing to do is spread your risk across different lenders, also ensure your loans aren't cross-collateralized, as this will limit your future lending.
You should also consider different strategies that assist in your lending. If one lender says no, it doesn't mean all lenders will say no.
It’s important to research as much as possible on different loan products, lender credit policies, servicing calculators and what their niches may be. All this information is helpful.
It’s also important to partner with a like-minded professional so you are on the same page - for example, a mortgage broker that really gets property investment.