Many Kiwis want to invest in property. They get excited, find a property they think will make a good investment, then apply to the bank for money. And the bank says “no”. It’s heart-breaking. What should these clients do? They still want to get ahead financially and think investing in property is the way to do it for them, but they can’t get a loan. Bankers don’t want to help because they don’t fit the box, and brokers don’t want to help because there’s no pay day in sight.

Over time the amount they can borrow from the bank will increase; their equity will improve as their house increases in value; and their incomes will rise. So, if you can’t get a mortgage for an investment property today, perhaps you’ll be ready in six years.

But that’s still a long time away. Couldn’t you shortcut the process? Could there be a way to get it down to one or even two years? That’s what our process for getting investment-ready is all about. It gives you six real strategies you can use to get investment-ready faster. Over the next five issues I’ll break down those strategies.

Strategy Two: Split Banking

While last month’s strategy, the mortgage buster, was one that all borrowers should use, split banking is by far my favourite. I won’t apologise at all for preaching either. This is a strategy that every investor should adopt. The split banking strategy is one I’ve written about before and that we have promoted frequently on the Property Academy Podcast. It involves using multiple banks to get your lending, rather than just one.

This will increase the equity you can access to expand your property portfolio in some situations. It will also protect you from banks forcing you to pay down debt if you don’t think that’s the right decision.

The Problem It Solves

Split banking can increase your equity, allowing you to borrow more. This can be done by splitting your home away from your investment properties, or by releasing one property as security all together when going through a restructure. In all cases, split banking gives you more choices. It puts the power in your hands rather than the bank you may have been dealing with up until now.

The Commitment

What do I need to use this strategy? You need two properties or more (or to be about to buy your second property). This is because you can’t split one mortgage across two banks.

You need enough income to meet more than one bank’s servicing criteria. Each bank’s tests are different, so you must pass both banks’ income standards. If there is only one bank that will say “yes”, then it may be that for now split banking isn’t an option. While I do preach this strategy, I wouldn’t say that you’re better not to do anything than to have everything with one bank, you just need to know that at some point it should be unwound.

Exactly How It Works

Split banking is simple to set up when adding a property to your portfolio. You set up a new loan with your existing bank and that loan will be the deposit for the property you’re about to buy.

For instance, if you’re buying a new build, you’ll set up a loan that is 20 per cent of the property’s value. You then go to another bank and apply to get the rest of the lending. For a new build, that’s 80 per cent. For existing, that’s 60 per cent.

If you already have multiple properties with one bank, you can still use split banking. In this situation you would look to stage your approach by first restructuring/refinancing some of your lending with a new bank. It’ll be best to use a good mortgage advisor for this who understands what you’re trying to achieve.

If you invest in new builds you can sometimes borrow more if you use split banking. That’s because there is an anomaly with new builds. You require 20 per cent equity to purchase them, but the day you pay for the house you need 40 per cent equity before you can borrow more against that property.

So there can be issues if you:

• use your own home as the deposit for your investments, and
• you have your own home and investment properties with the same bank.

That’s because once these new build investments settle, they require more equity, which comes from your own home. So, using one bank can leave you with less equity available to purchase your next investment. This can get a bit mathematical, so it’s probably best to work with your adviser on this. Or, of course, check out episodes from the Property Academy Podcast.

Steps Required

• Talk to your mortgage adviser about whether this strategy will work for you.
• Calculate whether your current bank will charge you any fees if you move to another bank. Sometimes there are break fees, and if this is the case it may be best to wait until after your fixed-interest rate rolls over.
• If needed, apply for a new loan at another bank to refinance existing lending.
• Your mortgage adviser will recommend which bank to use.
• You’ll need to work with your solicitor to handle the legal side. The old loan must be de-registered from your title (the legal description of your property), and the new loan must be registered. There will be legal fees involved in changing banks, which are typically between $1,000-$2,000 (depending on complexity and number of properties). However, you will often get a cash-back from your new bank. You can use this to pay your legal fees.

Sound simple enough? Probably not on the face of it. Like I said, working with an adviser is critical when using this strategy. This strategy has changed some of my clients’ lives. The number of clients who have come to me after being told they can’t borrow more, only to use this strategy and then keep borrowing (which means keep buying) is staggering. If you want to know if this strategy can help you, then get in touch. We’d love to help.