Concentration risk with same lender

Hi,

What are the finance brokers' thoughts on the significance or not of "concentration risk" of having too much loans/IPs with the same bank?

I'm asking for a family member who has a relatively large investment property portfolio and also has own business loans. These are a mix of ownership structures but ultimately comes back to the same personal guarantee of the individual. Most of her loans are currently with 2 or 3 of the big 4 banks.
She is now looking at signing another major IP purchase and her broker has come back with interest rate pricings and one of the big 4 banks she already has around 57% of her total borrowing with has offered the best rates by far. Presumably this is because they value her as a client because of the already substantial lending relation they have. Because this is a substantial sized new loan to be established, if she went with this same lender to get the best rates, then the bank would be responsible for around 70% of the total lending for the entire portfolio.

Now, for someone who is at very low risk of ever defaulting or getting into any troubles with any of the loans, is "concentration risk" a pertinent issue?
Should she go with another lender (at the cost of higher rates) to "spread" the lending more evenly?
I believe that her serviceability is not an issue.

What are the pros and cons of such a situation with respect to having too much lending with the same bank vs. intentionally spreading out the loans to various lenders? Is it only a perceived sense of comfort?

 

never have business accounts with the same lender as the loans as they can and do monitor cash flow. Also greater risk if default.

 

2 or 3 properties with the same lender generally isn't a problem. 5 or 6 has the potential to be a problem.

I've often consolidated multiple properties to a single lender (not cross collateralised for course), but that's often a repayment reduction strategy, not necessarily a growth strategy.

 

This is 5 properties with same bank, with 3 of them under the same trust ownership and the other 2 individual but she would be the beneficiary of the trust. Is it the number of the properties or the total loan value that is more important. This is nearly $7million loan spread across said properties with the one bank.

When you say "has the potential to be a problem".... what sort of "problems" have you seen or in theory could foresee?

 

Can the bank monitor cash flow (just because the business accounts are under the same platform for the bank) without one's express consent? It is one thing for them to ask for bank statements to verify cash flow or income, etc (especially if one is struggling with repayments), but if the borrower is meeting all their obligations, can the bank "monitor" your cash flow in the background without being provided that information by the borrower?

 

They can monitor everything you have with them.

I doubt they actively monitor your accounts, but if something starts to go wrong, they definitely will. I definitely agree, keep your personal and business accounts separate. The last think you want is the bank getting busy with your business accounts if the properties are having problems.

As to the concentration risk with properties, there's really no simple answer to this. It varies depending on the balance of the portfolio and how each property fits into that portfolio.

 

Depends what information and consents you have given them, and whether you have all your banking with that institution or not.

My main concern would be to avoid cross- collateralisation

 

I agree. My family and myself always avoid cross-collateralization. I can see the risks associated with cross-collateralization, and also of course there are implications if an individual is asked to be a personal or director's guarantor to a loan for say a trust.

However, I still don't quite get what the potential "risks" are if too much loan (number of properties and/or loan amount) with the one lender? Especially for a "good" borrower who does not miss or are late for repayments. A difference in variable interest only rate of 0.3-0.4% is not insignificant, especially when applied to a large cumulative loan amount.

I have heard of concentration risk before from brokers. Can anyone share specific examples of what adversely happened under such a scenario?, which could have been avoided, had the borrower spread out their borrowing across lenders. Situations where the loan was secured against the property being financed (no cross collateralization).

 

See

Legal Tip 30: The risks of having large number/volume of loans with 1 lender https://propertychat.com.au/community/threads/legal-tip-30-the-risks-of-having-large-number-volume-of-loans-with-1-lender.1553/

Legal Tip 242: Why is it safer to get all loans with a different lenders? Legal Tip 242: Why is it safer to get all loans with a different lenders?

Legal Tip 130: What is an All Monies Clause? Legal Tip 130: What is an All Monies Clause?

 

This is fantastic stuff Terry. Thank you. Read through them all.
It sounds like though the "concentration risk" issue really only applies when the borrower is struggling to repay loan/defaulting type of scenario. My family member is a very strong borrower who is always conservative with LVR and borrowing relative to cash flow/repayment ability and secure job/industry - so this type of scenario is highly unlikely. I suspect it would be worthwhile for her, if she can save around 0.4-0.5% off the interest rate (compared to nearest other lender offer), across total loan portfolio of close to $7 million with a major bank (one of the big 4) - I think the benefits would outweigh the remote risks here.

 

I guess it is like insurance. You only really need to insure your house just before it burns down. The trouble is knowing when that will happen (and it might be a bit sus if you insure just before a fire!)