Pros & Cons of Split Banking
Firstly, this is only for people who have more than one property or desire to have more than one property.
Essentially, if you have all your properties and mortgages at one bank, the bank can take collective security over all of them. Even if you have different entities and bought them at different times with different loan accounts, the bank secures the debt against all assets held with them. The main benefit is that you are likely to get marginally better interest rates due to the overall debt position being larger than what it would be when it is split banking. However, I have outlined some of the reasoning behind split banking:
If, for example, you had a rental in Christchurch and the insurance company was not paying out after the earthquake and you are not able to let the property, you might find yourself in financial difficulty. If you can’t afford to pay your mortgage the bank could force the sale of your owner-occupied property to cover the debt you owe them. If your debt was at separate banks, they couldn’t force the sale of your owner-occupied home. Naturally, they could pursue other avenues to recover their debt but at least it will provide you a few more options and time to make an adequate arrangement to repay your debt.
If the Reserve Bank changes the Loan Value Ratio (LVR), which they have done twice in the last 24 months, it affects your whole portfolio. Suddenly, if you had equity in your owner-occupied property to buy another rental, the rule change influences the amount of useable equity overnight. Whereas, if your rental was in a different bank and, for example, it was at 80% LVR and the rule stipulates 65% for rentals then the additional 15% required does not affect your rental property or your owner-occupied property. The bank can’t ask for more money.
Sale Proceed Protection:
Let’s say you had, for example, one home and two rentals and you want to sell one rental to release some funds, the bank will, upon settlement, take the proceeds of the sale of the property to reduce their/your LVR position. Let me explain: If you had 2 x rentals worth 500k each and the debt was 400k each and you wanted to sell one rental to release 100k to yourself, the bank would take the remaining rental and apply the LVR rule at 65% (current rule for rental properties) i.e. 500k x 65% = 325k. That is the amount the bank can lend up to, based on the current rule. Thus, your remaining debt of 400k is in breach of the bank rules and they would therefore take 75k from the proceeds of the sale to reduce their/your LVR position leaving you with only 25k from the proceeds of the sale. Again, if it was at separate banks then you could decide yourself how you want to use and apply the 100k.
Note: I am sure the above might sound confusing and feel free to give me a call to discuss to see how it applies to your situation, but in many cases I recommend split banking to protect yourself against some of the situations above.
**None of the above deems to be legal or accounting advice. You are always liable to pay your debt owed to the bank but how it is recovered is what is important here.