It isn’t such a good idea to use your current lender for your next loan. It is important to consider other banks besides your current bank when getting a home loan
Buying an investment property is the next step for many home-owners who have paid off a decent chunk of their mortgage and are looking to extend their wealth management plan. And while it might feel like a natural progression to seek finance from your existing lender for the second property – there are some very good reasons why your current lender is the LAST one you should consider getting another loan from.
- Award winning finance broker from W Financial
- 2007 & 2008 MPA Top Broker
- 2002 AMA Young Gun of the Year Nominee
Mortgage and finance broker Michelle Coleman from W Financial says a lot of people have a belief that it is easier and cheaper getting a loan from the same institution as you used for your home loan, but she says this assumption is not only false, it can be highly risky and limit your borrowing capacity.
Coleman says when you have one lender they often bundle all your assets together and cross-securitise your loan, which means they attach every loan they have with you to every asset. That way if something goes wrong and you’re forced to sell a property, the bank has recourse to all of your assets, not just the troubled one. However, if you use a different lender for every property, then the bank can only that one property as direct security, with no recourse to the others.
‘If you have a loan with one lender and a loan with another then it isn’t crossed,’ Coleman says. ‘Most banks like to cross all their clients’ assets - even if people don’t want to do that and even if it’s separate loans with separate securities.’
Coleman says banks sometimes cross-securitise your assets without you even knowing, so there is often no way around this if you use the same bank for all your properties.
‘And if people default on one loan, the bank they can still have access to the whole lot. If you have four loans with four different banks then if something goes wrong with one, the other banks might not even know,’ Michelle Coleman
Coleman says another key reason for not using one lender is that banks are more conservative in assessing your ability to service a new loan if you already have another loan with them. For example, if interest rates are at 6%, the bank will assess your ability to repay your loans (that is, both your existing and your proposed loans) at around 8%, so they know you have a buffer in case interest rates rise.
However, if you are applying for a loan with a different lender, they won’t add in this buffer for your ability to repay the other lender, because it’s not something they need to think about in their own risk management.
‘So by separating the lenders, it means it actually improves your serviceability,’ Coleman says.
Save on mortgage lenders’ insurance
Another drawback of getting a second loan with your current lender is that they’ll bundle all your loans together to calculate your mortgage lenders’ insurance.
‘If you’ve got three loans at $200,000 and you link them together, they’ll charge the premium based on $600,000 rather than $200,000 each,’ Coleman says.
The higher the loan amount the higher the premium on mortgage insurance, so bundling works against you when it comes to this as well.
Reasons why you might stay with one lender
Coleman says the common argument for deciding to bundle all your loans together with only one lender is that people believe they can lower their bank fees or negotiate a better interest rates because of their pre-existing relationship with the bank. However, she says it is often possible to negotiate lower fees on investment property loans anyway (because you don’t need as many features as your owner-occupied home) and that any fees are also tax-deductible so this reduces the impact of the extra fees.
Similarly she says it is not necessarily the case that you’ll get the best rate by staying with your lender and that many home-buyers are surprised at how competitive rates are with other lenders once they do their research beyond their existing bank.
Even if you do end up paying more, Coleman says, it is usually a small price to pay for risk protection of your assets against the banks and for you to be able to have access to greater funds because of the way serviceability is calculated.
Do your research
Whatever approach you decide to take, make sure you do your research into the different types of home loans available by comparing interest rates, fees and features of the loan (Our website is a great place to start!). Whether you talk to the lenders directly or work with a mortgage broker to help you find a good deal, set out all the numbers to make sure you’ve found the best and safest strategy to suit your financial plan.