Legal Tip 30: The risks of having large number/volume of loans with 1 lender

The risks of having large number/volume of loans with 1 lender


Most people on this forum are investors and many aim to purchase multiple properties. This usually means multiple loans would be needed. Borrowers have the choice of using one lender or multiple lenders.


The advantage with using 1 lender:

• greater bargaining power with interest rates and fees
  
  
• convenience of having to deal with one lender for internet banking, paying interest etc
  

The disadvantages can have more of an impact

All your eggs will be in the one basket. Larger banks are generally sound, but some of the smaller lenders will sell their loan books from time to time. You may end up dealing with someone other than the lender that did the loan originally. This such a big deal as these days it is relatively easy to move lenders.


The real issue is if you are having cash flow difficulties. If for whatever reason you are unable to pay one loan the lender will soon know about it. You may have one or more properties between tenants while you are between jobs for example. the larger the overall debt the more the lender will be worried.


This sort of thing can be easily ‘hidden’ when with multiple lenders. if you have 5 property loans with 5 different lenders and you have cash flow problems you could keep paying 4 of the loans but ignore the 5th for a while. It will generally take months before the lender starts to get serious and perhaps 6 months or more before they attempt to take possession.


In the meantime your conduct with the other lenders can remain good without them taking action. This can allow you to sell down 1 or more properties on your own terms and to possibly rectify the arrears of the other loan and prevent the bank from taking possession and selling it. If all of the loans were with the same lender then this would not be possible.


Even where your loans with one lender are not crossed collateralised the lender would be able to take action. Most loan agreements have ‘all monies’ clauses which are terms (usually multiple terms over different parts of the various agreements entered) which all the mortgagee to take money from any account or loan with the same lender and apply it to another account at the same lender.


The risks increase when large sums of money are in savings or offset accounts. Especially if you have borrowed funds and parked into an offset (avoid this). But if you had large sums of cash lying around you probably would not be defaulting on loans.



There are also the credit type risks to consider:

• The lender will know your situation well.

• It may be more difficult to borrow as the debt grows as this is more risky for the lender,

• Maximum exposure limits

• Lower LVRs potentially

• A change in serviceability assessments could prevent you accessing equity easily

However, as exit fees have now been banned it is relatively cheap and easy to move from one lender to another - if you are not cross collateralised that is.


One strategy may be to take all your loans to one lender, get the biggest discount you can, and the move a few of them to other lenders as specials pop up - $1000 rebates, special rates etc. Just work in with your broker so they don’t get unexpected clawbacks.

 

If you had loans spread amongst CBA, Bankwest and Aussie, is it pretty much the same as having them all with CBA?
Same with St George and Westpac?

 

Great post as usual Terry. Would love to see these made "sticky" as they answer commonly asked questions.

I will respectfully disagree with this point. With the comprehensive credit reporting in place for the last few months, this is harder to do. Any payments missed are reported across the industry. So, repayment history is more transparent now than ever before.

 

Yes that is a good point. But it is not just missed payments, perhaps levels of cash could rapidly drop, income rapidly drop etc. More of an issue with commercial than resi.

 

Yes as the Mortgagee would be the same company. St George loans for example secured by mortgages to Westpac Corporation Limited.

 

Incorrect..... they are securitized and as part of agreement there needs to be chinese walls. If there is an over reach they are in reach...go straight to APRA....