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Your Mortgage Releasing Equity Through Selling

Despite how simple it may seem, it isn’t always easy to release equity by selling property, writes Peter Norris.

By: Peter Norris

30 June 2019

I’ve had a reasonable number of clients recently who intended to sell a property and retain the equity – normally to improve their cash position or, more commonly, move into a different investment strategy such as property trading or from residential to commercial investment.

These clients have had most of their lending through one bank and when looking to sell, they figured that as long as the remaining lending stayed within LVR requirements based on the remaining properties, then they could keep the rest.

But that’s not quite the case. The bank at this time will complete a full assessment of the remaining situation and if they deem appropriate, will keep as much proceeds from the sale of the property as they need to in order to meet their interpretation of responsible lending requirements. They may take the full sale proceeds.

The problem with this is that the vendor doesn’t usually confirm the numbers from their bank before selling their property, and instead they find out about it one or two days out from settlement by which time they have no choice but to meet the bank’s demands.

Leverage combined with lack of cash flow is the biggest risk for investors and it materialises quickly.

Plenty of investors Are jumping on the Bandwagon saying “property never goes Down” – we are Clearly amid boom Talk again

Bubble will burst

You can have millions in paper wealth tied up in property, and it can disappear if you don’t plan properly when looking to sell to move onto your next strategy.

Looking outside of Auckland for cash flow, as is currently common, could trigger the selling. We’ve seen this first-hand in 2009 when investors heavily exposed to provincial cities like Rotorua and Whanganui started to suffer cash flow issues from tenants missing rent payments (high unemployment).

Plenty of investors are jumping on the bandwagon saying “property never goes down” – we are clearly amid boom talk again. All have great reasons they highlight to suit their argument – shortage of housing, Auckland’s Unitary Plan, immigration, and cash out of China.

The Chinese property market is in a massive bubble. Property prices are 30 times income compared with about 9 times here. When (not if) it bursts we will feel the impact here.

▶ Now is not the time to get drunk on highly leveraged purchases. You should hopefully have your overall loan-to-value ratio down below 70% at this point in the cycle. Regardless of the number of properties.

▶ Focus on improving cash flow. Increase your rents. Review your portfolio and consider selling your worst performing properties. That might also free you up to buy a better property without taking unnecessary risk. I’m surprised the number of people who don’t sell under-performing properties and still want to leverage up in this market.

▶ Cash is critical: make sure you have access to a decent cash reserve. Also try to keep your RCR away from the bank you have most of your rentals with. Be particularly careful if you are business managed, as your relationship manager has to conduct an annual review, regardless.

▶ Have at least two banks in the mix and possibly a third for your home.

▶ If you can’t get your home debt-free consider having one property at a minnow lender (SBS, TSB, Cooperative, Sovereign) so you are guaranteed access to the equity should you sell it. 2016 will continue to be the right time to spring clean your portfolio and get everything in order. You can continue to look at opportunities, but assess them carefully and make sure you have your downside risks properly covered – and when selling, get your ducks in a row first.

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