Change of situation

[SR1]

Folks looking for your input on a pending change of life situation and ramification for my lending arrangements.

Bank with one of the major banks and have two investment properties and one ppor. These have been established with a current PAYG.

Over the course of the following 12 months my plan is to step out of the PAYG.

Expect that my income will be reduced quiet dramatically (ie. will largely be passive based income from equity/fixed income market investments).

LVI around the combination of the property is ~80%.

What are the risks around my lending situation? Assuming that I continue to make my repayments on a timely basis.

Welcome any thoughts/input and q's if I can help clarify.

 

[Redom]

Folks looking for your input on a pending change of life situation and ramification for my lending arrangements.

Bank with one of the major banks and have two investment properties and one ppor. These have been established with a current PAYG.

Over the course of the following 12 months my plan is to step out of the PAYG.

Expect that my income will be reduced quiet dramatically (ie. will largely be passive based income from equity/fixed income market investments).

LVI around the combination of the property is ~80%.

What are the risks around my lending situation? Assuming that I continue to make my repayments on a timely basis.

Welcome any thoughts/input and q's if I can help clarify.

No problem on your existing loans - so long as you can continue to repay them.

Reducing your income will impact your ability to borrow more in the future. It will also reduce your ability to access equity that generates in your property.

Cheers,
Redom

 

[Jamie M]

Hiya

As self employed you'll generally need to show two years financials to apply for finance.

Existing loans are ok providing you stay on top of repayments.

Cheers

Jamie

 

[Qlds007]

Access your equity prior to walking away from exiting full time work.

Get your Accountant on side as you might need him to sign off on an Accountants Certificate down the track if you have to go lodoc.

Cheers

 

[Jess Peletier]

Are your existing properties are cross collateralised?

If they are, it might pay to untangle them if possible before making the change.

If life throws you a curve ball in the next couple of years (or ever, really) X-coll can make life complicated if you need to sell and as mentioned before, you'll most likely need a couple of years financials to adjust anything once you are no longer employed.

With lower income on the horizon I'd be inclined to lower my risk as much as possible in case the market heads south or some other unforseen situation raises its head.

 

[Greg Reid]

Now is the time to get your finances in order.
I agree with the other comments, look to separate lenders for each property, take the opportunity to obtain better deals, refinance to 80% if you can and establish LOC facilities even if you think you will never need them.

It is always better to have access to funds prior to when you may need them, think of it as a safety net. Far easier to do now in a PAYG situation than relying on trying to access money on reduced income.

If you make the payments, lenders do not keep track of employment or anything else in most cases.

 

[Terry_w]

Yes. plan ahead

Uncross if crossed (otherwise you cannot release when sold)
Exxtend IO period as long as possible
Access equity for the future.

Plan ahead for capitalising of interest - use this loss of wage excuse to legitimate improve deductions - seek tax advice first.

 

[Marty McDonald]

Are your existing properties are cross collateralised?

If they are, it might pay to untangle them if possible before making the change.

If life throws you a curve ball in the next couple of years (or ever, really) X-coll can make life complicated if you need to sell and as mentioned before, you'll most likely need a couple of years financials to adjust anything once you are no longer employed.

With lower income on the horizon I'd be inclined to lower my risk as much as possible in case the market heads south or some other unforseen situation raises its head.

Very good advice Jess

 

[SR1]

Awesome feedback and advice really appreciate it. Currently with one bank but non of my loans are crossed. Have the started the process of borrowing upto 80 per cent of current vals. Is the sense that I should be diversifying my lenders the best approach? The other thing I've got going through my mind is fixing some part of the loans - trying to balance out the loss of liquidity with the attractive fixed terms on offer. Appreciate the views- great advice!

 

[Jess Peletier]

Depending on which lender you're currently with and your future goals, it would be worth a chat as to whether changing lenders is important or not.

 

[Terry_w]

In the past 6 months I have been approached by at least 2 clients whose dreams were ruined by inability to do what they wanted because of poor loan structures.

1. Guy had 10+ properties and decided to retire young and sell one property every X years to supplement his incomes from rents - which wasn't enough to live in.

The problems began when he sold the first property. The bank insisted on keeping all the proceeds and using it to pay down the remaining loans. They did this because he wasn't working and therefore he could no service the loans!

2. An older woman who was asset rich but income poor. She had too much assets to qualify for the pension and the rents were not enough. She wanted to change her loans to IO - they were IO but they had reverted to PI after 5 years. The bank refused saying she had no income so how could she service. So the next plan was to sell 1 property - guess what happened - the bank said they would be happy, but would keep all the proceeds.

both of these banks were teh same - and the name started with an N!
But the problems could have occured with any bank if the loans were cross collateralised.

SR I would go to 3 different lenders myself. If things start to go bad this would give you around 6 months breathing space.

 

[Jess Peletier]

So in terms of risk management, and assuming you're currently paying P&I, making all loans IO and keeping the saved funds in an offset linked to PPOR would give an easily accessable buffer to draw on should something go bad. Also reduces non deductible debt as a bonus.

 

[Greg Reid]

Often it doesn't matter if they are cross securitised if they are with the one lender, most will have an all monies clause anyway and do what Terry said has happened to his clients and most of ours as well with poor structures.

Our 12 years or more of education does not include financial understanding and most of us have our parents beliefs that bank managers will assist us and give good advice. Wrong! The work for their employer to get the best return they can for them.

There are some very good bank people but most have little understanding of the issues like structure, protection, tax effectiveness, etc and I have not met many bankers who will say to a client, you would be better seeking another lender for this property as in the long term having them all with us might bite you in the backside.

Find a good broker who understands investment finance and properties, go seek information that will help you achieve what you want, not lock in what a bank wants.
As to fixed rates, there are some attractive 2 and 3 year fixed rates around and having a balance of variable and fixed may work for you as long as you are very confident you will not want to refinance the property in that period or sell it.
Good luck with it.

 

[Corey Batt]

Often it doesn't matter if they are cross securitised if they are with the one lender, most will have an all monies clause anyway and do what Terry said has happened to his clients and most of ours as well with poor structures.

Except so long as they're meeting their repayments when due and showing good conduct, the lender isn't likely to use the all monies clause when selling down assets as shown in Terry's examples, so they can have the flexibility to make use of a sell down strategy.