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Taking Care Of Business

As banks look to find new revenue in a low-rate world, investors are increasingly considered business customers. John Bolton explains the repercussions for borrowers.

By: John Bolton

30 September 2020

When it comes to how lenders treat professional property investors, they are markedly different. Even bankers within the same institution will be different depending on the business unit they are in, their credit authority, experience, and their appetite to push credit criteria to its limit.

On top of that, it’s a moving target with policies that continually change because of a competitive housing market and conversely because of uncertainty around market conditions. One moment, lenders believe house prices are set to fall by 15%. The next moment they are forecasting them to increase by 7% and the world is sunny again. That is, until the next storm cloud.

What Makes Someone A ‘Professional’ At Property Investing?

I’m going to define a professional investor as one who draws a significant portion of their income from property investments. Most banks would define that as having six rental incomes, but that number is largely meaningless because six rental streams in Invercargill is not the same as six in Auckland.

The lack of clarity from banks when it comes to big investors makes it hard when trying to navigate your way through the finance maze. If you are financing a house and you hold commercial properties in your portfolio then you are highly likely to end up dealing with the commercial department of the bank. Equally, if rental income is more than 60% of your total income you are likely to end up dealing with a business banker, with the bank “treating you like a business” which isn’t entirely correct. What it really means is you’ll be charged fees and have to pay more for the same level of service.

‘The lack of clarity from banks when it comes to big investors makes it hard when trying to navigate your way through the finance maze’

It takes patience and perseverance sometimes to navigate your way through this. And sometimes you need to accept that as your portfolio grows the pricing will look more and more like commercial pricing. Here are some real scenarios.

Case Study: A Client With $11 Million Of Debt And $30 Million Of Property

The portfolio is a mix of residential and commercial. The bank takes a property specific view of the client and expects that the income on a property will cover a minimum of two times’ the interest cost. That’s fine for commercial property where you might only expect to borrow up to 50% of the value as this person does. But this model doesn’t work for residential property.

We had one of the client’s banks maximising his lending on two low yielding residential properties to 40% LVR. And then the non-banks can’t cope with the complexity of his commercial properties and it otherwise gets too expensive.

Another Example

In another instance a different bank wanted to charge a 0.75% establishment fee to a client to refinance four residential houses. That fee would have been $17,000. And the interest rates would have been 0.50ax% above housing rates.

These situations are surprisingly common and becoming more common as banks look to find new revenue in a very low-rate world. I think it’s unrealistic to expect consumer pricing, but I would expect to see competitive rates.

If you’re in this space, it is a matter of being patient and working out what bank will do what for you and that process can be slow, especially now. In these scenarios it is case by case, especially with the rules so fluid.

One thing is being able to get an approval that passes bank servicing calculations, and then making sure you get competitive pricing. Squirrel can help. It costs nothing to bounce ideas around with an adviser and come up with a plan.


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