Podcast: Cheat on the Bank...They'll Give You More Money | Ep. 233

Posted by Ed McKnight on 05/05/20
Cheat on the Bank Theyll Give You More Money 001
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Show Notes

What's Covered in the Show?

In this episode, we discuss split banking and why you can get more money from the bank if you cheat it on it with another.

This is because when you have all your lending with one bank, they cross secure the assets and you can only borrow a maximum of 70% against the value of your investment properties. But, if you move that lending across to another bank, you're able to borrow up to 80% of the value. That leaves more useable equity within your own home.

We also mention our upcoming property investment webinar, which is being held this Tuesday at 7pm. You can sign up using the previous link.

This episode is based on a previous webinar we held called How to Grow from 2 to 5 Properties. Check out the whole webinar through the link.


Transcript of the Podcast

Ed McKnight: Hello and welcome along to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and today on the show we're talking about split banking, and this is a follow on from the webinar we did just earlier this week where we was talking about how do you grow your property portfolio from two to five properties?

Remember, this is the number one topic that property investors told us that they wanted to know more about, and this is for people who tapped out either with their equity or income. The bank said, no, because you're lacking on one of these two.

Now this is how to get more equity so you can keep buying more properties. Now in this case, and it's taken me a little while to get my head around exactly how it works because the LVR or the loan to value ratio restrictions, can get a bit complicated about this. This is simply, or split banking is simply where you take one property, where you had multiple properties with one bank, and you split them out across multiple banks.

Now, Andrew, just walk us through how this works and why it increases the equity position that a property investor has.

Andrew Nicol: Yeah, sure. So this was a really interesting topic for the webinar. Really enjoyed presenting for this because the numbers, when you break them down a really, really cool, if you ask me. I did a scenario, in the webinar where we spoke about someone who maybe has a couple of rental properties now and because of cross security with the bank, they're limited in terms of what they can borrow next time.

So in this example, I assumed that they had a house of 800,000 and two rental properties worth 525,000. And that their lending was 300 K on the personal house and 450 K on each of the rental properties. So they bought them a couple of years ago and enjoyed a bit of growth. I'll talk a bit about bank value and usable equity in each of the scenarios. And again, if you want to see this in its form with the numbers, you can go back and rewatch that webinar if you didn't see it.

So, the house, the owner occupied house, you can borrow 80% on that. So that gives us a bank value of $640,000. Now the debt 300 comes off that. So that gives us usable equity of $340,000 so that's a good start. Now the investment properties they're with 525 each. So just to keep it easy I've used exactly the same numbers and the max LVR on an investment right now is 70% so the bank values only 367,500 but the debt's 450 so the debt is more.

So the usable equity for the rental properties is actually negative 82,500 each. So you've got to remember your negative usable equity if you're all with one bank, comes off your usable equity on other properties because of that cross securing. Even if it's in a company and your house is in a trust, there'll will be interlocking guarantees. So what that means is the usable equity nets out to be 175,000 which if you're buying another existing rental property, is only a $583,000 purchase price.

So yes, they can go out and buy one rental property, but the whole idea of this webinar was to show people how to supercharge their portfolio. And so split banking allows for that. So I've worked a scenario of maximising that usable equity through split banking. So bear with me.

Step 1 is to move both the rentals to another bank. And you can do this under an exemption of the LVR restrictions, and it's called the dollar for dollar refinance exemption. So you're allowed to up and move your mortgage to another bank. And the rules don't apply with LVR. The bank will still have their own LVR rules, so they don't want to be lending above 80% right now. So, and if they did, they would be charging you extra. So that wouldn't necessarily be the best option.

So, you can move 80% of the value of your property, so long as you don't add anything extra onto that loan. So in this case, 525 being the value of the rental property at 80% is 420 so that means you can move up to 420 of that 450 mortgage...

Ed McKnight: I just want to jump in because this is such an important point, if you leave the property in the same bank with your owner occupier, you can borrow up to 70% of it. If you move it, you can borrow up to 80% of it.

This is where you're starting to unlock more equity. Carry on, Andrew.

Andrew Nicol: That's right. And there's only because there's this exemption there, so now you can move both of those properties. You can't pay back the full loan, so you can't pay back the full 450 cause you've only got 420 with borrowing power against each of those rentals are 80% so that means that you're going to have two residual loans of $30,000 left with your main bank, the one that your house is at.

But then afterwards, this is how it looks. You're going to have both rental properties with a new bank, 420 K, debt on each of those, so 80% and then that leaves your house at 80% so again, bank value 640 minus the 300 personal mortgage, and then minus each of those 30 K loans. So it brings up your usable equity to $280,000 so by $105,000 which means that if you're purchasing existing properties, you can borrow up to 933,000 and if you're buying new, you can borrow up to $1.4 million.

And as you know, we specialise in new and, and so that means that you've got a huge amount of purchasing power. You can essentially buy two properties with $700,000 each. The same person just by using split banking and being a bit creative can now buy two rental properties today rather than buying one property today, just by going through those refinance process which, yes takes a little bit of time, but you can get a good broker to take care of all of this for you.

All of a sudden you're buying twice the number of rental properties and your future self will thank you for it.

Ed McKnight: That's exactly right. And so just comparing these two scenarios as well, scenario one: you just leave everything exactly where it was. This person was borrowing a maximum or buying properties at maximum worth $875,000 but split them out, put them with different banks, that goes up to 1.4 million.

Now that's a 60% increase in the amount of property that you're able to purchase just by splitting it out with different banks. And remember, again, I just want to, this is kind of the secret sauce or how it actually works. If you leave it where it is, you can only borrow up to 70% of the value, but move it to a different bank you can borrow up to 80% of the value on those investment properties, even though they are existing.

Now, Andrew and I, just before we hit record as well, were talking about, well, you know, if somebody wanted to cheat the rules, you actually could buy an existing property with a 30% deposit or 70% lending, we would say, and then move it across to a different bank and refinance it at 80%.

In that case, you would essentially by buying an existing property, with an 80% loan, but Andrew, that wouldn't be in line with the spirit.

Andrew Nicol: Just to clarify a couple of things on that. Firstly, just one thing I think Ed just said 853 when he meant it for 583. As they stand at the moment its 583 and it goes up $1.4 million. So a big jump there...

Ed McKnight: Andrew, those numbers, sorry. You did tell me to remind you that those, that 583 is based on existing that's on a 30% LVR. I forgot to remind you for this episode. Then it goes up to 1.4 if you're doing new.

Andrew Nicol: One thing I wanted to clarify on the borrowing a mortgage and then moving it to another bank. That you technically could do. You can only, you have to refinance the actual mortgage. So you have to borrow essentially a hundred percent so you'd have to have cross security and borrow a hundred percent and then move the 80% across somewhere else.

But a word of caution, this is going against what the spirit of the code is, and you would find that the bank might scrutinise that and if you've got a broker doing that they might get themselves into trouble.

So we certainly wouldn't recommend it doing something like this, just to future proof yourself is fine, but if you're settling things at 100% essentially using cross security and then moving 80% across, the banks will probably cotton onto that pretty quickly.

Ed McKnight: That's if you're doing it for existing properties to get around the 70% LVR, but would still be kosher for new properties right?

Andrew Nicol: Absolutely.

Ed McKnight: Fantastic. Well, let's wrap it up there, but please don't forget to rate, review and subscribe, and I'm actually going to put the link to that webinar in the show notes.

So tap or swipe over the cover art, and you can watch it. It's about 60 minutes long, and remember we didn't do this just because we thought it would be a good thing. This is the number one thing that you guys told us you wanted to hear more about when we did that property investors survey and look, some of the feedback we're getting is really fantastic. So, we're going to keep following up as well on the key take outs from that survey.

Now I just want to read out one more review that we've had on iTunes, and there was a really good one that I've just lost because somebody was talking about that they've actually gone out and bought a rental property because of it. Just trying to find that one. So this is a five star review. It comes from Tatiana_130. And the headline is amazing. They say, this is an amazing podcast, has helped me buy my first rental property. Thank you so much. Amazing. Hey, we really appreciate that Tatiana, and please do leave a review if you haven't already. We really appreciate it and it does help us find more listeners.

Thanks for listening to the Property Academy podcast. I'm your host Ed McKnight, and I'm Andrew Nicol, and we're going to be back again tomorrow with even more daily strategies, tactics, and insights to help you get the most out of the New Zealand property market.

Until next time.