Annual Review on LOC & Mortgage Debenture &

[Chilli]

Hi all,

Would appreciate your opinion on this, particularly from our good brokers. Which bank ?

We currently have a big loan with big bank A for our 3 IPs . The IPs are under a DT with company trustee , we (my partner & I ) are directors. The security for the loan is :

• mortgage on the IPs
• and Mortgage Debenture on the company trustee.

We are in the process of organising a LOC against the equity of out PPOR.
PPOR in under our names. We currently have 2 offers one from bank A and one from bank B.

• Bank A offers a LOC 150K more than bank B with annual review. When I asked the banker what the annual review was for the banker said :
“basically it means that we speak to you on an annual basis to ensure that you are still happy with the facility. If you are then we just leave it as it is. If you don't like the facility then we will try to find something that is more suitable for you.”
is this for real ??

• Bank B offers 150 K less than bank A but the LOC will be independent from bank A. Rates and fees are not as good as A but not by a great deal . Review in 3 years not annual.

Obviously I would like to take the offer of a bigger LOC from bank A, but not if it is associated with more risks since all my loans are with the same bank, and not sure about the impact of the annual review.

Would you go for bank A or bank B if were in our shoes ? Have any experience with annual review of LOC ?
Thanks for any thoughts.

 

[Medine]

Hi Salsa,

I'm afraid I've never heard of a review that is a customer service exercise. Usually a review involves the bank verifying income and valuations. I'd read the fine print very carefully if a customer service review was offered to me .

If they decided that your income or valuations were not okay they could recall ALL your loans . The contract probably says that if the bank is not happy for any reason they can require full repayment of all facilities at any time. So they probably don't even have to give a reason.

Anyway, read the fine print on your offers and you'll be able to make up your own mind!

In terms of structure, I would be looking for a new lender for my PPOR. I believe this gives a buffer in case something goes wrong .

Cheers, Medine

 

[Rolf Schaefer]

Hi Salsa,
I am sure your banker must be on some drug or so - at the least he/she is a very good sales person.

I have never ever heard of such an explanation of a review.

As Medine has already pointed out, during the review the bank usually assesses your current cashflow and assets and liabilities; and if the bank is not happy with the information then they may recall all or part of your loans until you are again within their lending parameters (it is all in the small print).

You are well advised to take out the loan from bank B thus avoiding cross-collateral and possible (nasty) reviews.

I do understand that bank A is offering you a higher limit - but that could just be a customer retention measure - is it really within your safe repayment capacity?

Just my 5 cents.

 

[Mr Ed]

Slasa,

Annual reviews are common with commerial lendings and Self Employed applicants. Strongly advise to avoid annual reviews. They can change rate margins terms, what ever you like. Remeber the bank is a tool to get you where you want to go. Keep the cards in your hands and don't play to their song.

You want set and forget term loans. Will they give it to you in a fully drawn term loan IO for say 5 or 10 years and then park the funds in an offset acct or even on redraw ?

Regardless what the bank person tells you it is what is written in the contract.

I'm with Rolf & Medine

 

[Buzz]

It is difficult to put a price on not having an annual review. This usually would come to saving a few bucks on rate rather than the lure of extra cash so in this instance I can see the temptation.

However in my mind you need to weigh up how you will feel a few years down the track.

Lets assume life throws a curve call, you have a tenant who falls asleep with the heater on and the bed catches on fire (they are not hurt) and although land lords insurance covers the damage they take months to fix the problem in which time the tenant does not pay rent, they leave, the bond does not cover cleaning the place up and further tenant caused damage, let alone the lost rent. (This happened to us so it is not outside the realm of experience). Now lets assume you are between jobs or recently moved to a new field in the job of your dreams and you are on probation.

Then the bank pulls their annual review. They want rental statements ( oops place still being fixed and no rent for 60 days), they do a valuation (at your cost of all your properties - one is in a state of disrepair) and you are on probation and hence your current employment is not giving them much confidence.

So what do they do, well they can do a few things the least harmful would be coverting all your properties to principal and interest repayments ( just to add to the pressure on you) and they restructure your loans so now you have your home cross collaterise with your IP's.

This one step could restrict any future access to equity and effectively leave you in a position that would take a very patient and thorough mortgage broker to extract you from.

So is the possibility of annual reviews for the next 30 years worth the extra $150k you can borrow?

I agree with Medine, the flippant approach by your lenders rep now - may not be the flippant approach of the guy you deal with next year or the one who replaces him the following year for the next 30 years. Get it set up right now and you will be setup for the future, get it wrong now and the stress, additional cost and limitations for your future investment may well make it not worth your while.

Just my thoughts.

Jane

 

[Chilli]

Thank you for all the comprehensive posts they are much appreciated.
My understanding from the posts is that LOC reviews are risky. If so, to me annual reviews or 3-yearly reviews carry similar risks when you are talking long terms as some of the post mentioned 30 years bank B is not much safer than bank A only marginly ?

....Does it mean LOC should only be used if no review condition.
Are there banks that offer LOC with no review or at least 5 yearly review ?

I read that a lot of forumites here on SS are using LOC, can I ask if you have review as a condition on your LOC and if so how often ?

Thanks a lot.

 

[Mr Ed]

Residetial LoC's are reviewable and we do our fair share, have I seen a client have theirs reviewed? No

Commercial LoC's /o'draft's / business loans yes have seen them reviewed annually, it is part of te deal.

Here's a trivial example, I have a bank g'tee for my bond on my business premises it is for $7000, I recieved a letter from WBC this week requesting my '06 company & personal returns as it is up for review.

Letter was duely filed

 

[Rolf Latham]

Hi Salsa

Many locs are evergreen................there are no defined review terms per se ........but as with almost all types of loans the lender has disgression to call them in pretty much at any time by simply declaring your loan as in default............ we think your valuations no longer support the loans etc, iv only seen it happen once...........the borrower was up to date with their repayments, but their income position had changed.

Usually, a one or 2 year review term is pushed upon a borrower because the facility is at the edge of what the lender would like you to have, and is viewed as sort of a probationary period.

If you have paid your loans on time and your income or exposure position has not changed (that is worsened) in the eyes, then they may continue the facility.

ta
rolf

 

[Spectre]

Hi Salsa

If it is CBA then depends on where you are - retail or Bus Bank.

If its business bank then normally they want you to send in your financial statements for each year that you have dealings with them on ongoing facilities then they basically stick it in the file (nowadays they send it for scanning and it gets imaged but thats system wide not just b/bank). Similar to the request letter that Mr. Ed refers to (but noting thats westpac).

Sometimes if they have time they'll compare the tax returns and make sure you arent losing $ or the business is still going well etc, then they adjust your risk rating and so on. its a long story with them.

Normally what happens re the reports/review... (noting this is CBA)

If the debit interest is greater than the credits going in then their system creates a report and then it ends up on your RM or branches or area offices desk to review your accounts and make sure you arent going backwards etc its done mainly to make sure they arent going to have a loc which is out of control.

hope that makes some element of sense.

Its interesting but I dont know what their review policy is on low docs re getting the returns.