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Finance case study: When lenders say no

Monday, 19th Sep 2016
Categories: Finance, Newsletter

declined loan application

An investor who had amassed a portfolio of 5 properties engaged Momentum Wealth after their investment plans had come to an abrupt halt.

Despite having a high income, great rental returns and over $1 million in equity, their current lender wouldn’t lend them any more money.

The client’s goal was to buy several more properties before they moved into a consolidation and pay-down phase prior to retirement.

Upon review of their current loans, their Momentum Wealth mortgage and finance specialist discovered that the loans for all five of their properties were cross collateralised with one lender.

This effectively tied all five of their properties to the one lender and meant they couldn’t refinance one property without refinancing the others because they were secured against each other.

Despite the client’s strong financial position, they had reached their borrowing limit with this particular lender and hence their request for extra funds had been denied.

Their Momentum Wealth broker investigated the opportunity to separate the loans (so that each loan for each property would be freestanding) and then refinance where necessary to secure extra funding elsewhere.

Lending criteria and limits can vary widely from one lender to another so in many cases a new lender will approve a loan even when the current lender won’t.

After considerable consultation and work with the lender, the broker was able to separate all the client’s loans, obtain the title for their home from the bank (unencumbered) and then secure three more loans for the client. This included investment loans for two further investment properties with a new lender (both stand-alone) and an investment loan secured against their home for the deposits and costs associated with these purchases.

With this new loan structure, the client was able to purchase two additional investment properties and continue on with their investment plans of expanding their property portfolio before moving into retirement.

The new loan structure also held significantly less risk because a review or change in one loan (e.g. the sale of a property) would have no impact on the other loans now that they were not cross collateralised.