How to guarantee you can keep your money if you ever decide to sell a property. You will learn about separating securities and how to arrange your portfolio to your advantage.
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Checkout www.irefi.co.nz/calculators/Scorecard to find out how much equity you have available, what size mortgage you could service, and if there are any opportunities to save money on your mortgage.
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You own your properties and can do what you like with them right? Not quite…
If you have multiple properties cross-secured (think in terms of keeping your eggs in one basket) then you actually have to double check with the bank before you can take your cash proceeds from property sales and you might NOT have all the flexibility to do what you like.
Imagine selling one of your properties, expecting to keep the cash, but the bank has their mind made up that they want the money first. It happens all the time.
If you were sitting at a poker table with a big stack of chips, and the buy-in is small, would you bet your whole stack? That would be an unnecessary risk. You want to take some chips off the table ASAP.
This is what happens when you build up lots of home equity and do not remove or separate your property’s security at the bank. This can be solved (in most cases) relatively easily by involving another bank or freeholding a property.
If your loan-to-value ratio (LVR) is low enough, you can (and actually should) remove one of your properties from the bank’s grasp. You might transfer this property into a trust to protect it even more and make passing it on that much easier.
The key thing is this: do not have 2-3 houses secured at the bank when 1 is enough because this limits your freedom to buy and sell in the future.
Cross Securitisation is sometimes known as cross collalatorisation. It refers to when you pool multiple properties together and the bank treats this as a single security. For instance you have 2 properties worth $900k and $600k respectively ($1.5mn in total value) and only $400k in debt… your debt is secured by both properties. In this case you could freehold one of the properties or split the debt and maximise the tax efficiencies.
Let’s look at a case study:
We recently helped a local couple in their early 60s, with 4 rentals and their home, deciding what to do next:
Julie and her husband have almost had enough of work, some of their friends passed away and others had become ill recently, and they are beginning to think it’s time to enjoy life. They have worked hard and feel it’s time to focus on themselves.
They are asset rich with 5 Auckland properties worth about $5mn, but cash poor, with their incomes covering the mortgage debt and living expenses. They were thinking about selling one of their rentals to reduce their $1.5mn of debt and give them some cash in the bank. To make sure they didn’t trip up at the finish line, they finally decided to get advice from advisers who don’t work at the bank. Their bank account would not be replenished and they will still be cash poor.
What Julie and her husband did not realise is that if they sold one of their houses, the bank would probably want all of the cash and they would simply be selling a cash producing asset for no actual cash gain. The agent would be happy, the bank would be happy, but they would be making a huge mistake.
So Brandon at iRefi.co.nz helped them remove one of their properties as security and freehold it. They chose the property they would probably sell first (in the future). The bank did not want to do this because it weakens their position. In fact, your bank is not going to suggest that you leave less on the table for them to secure your debts. Your aim should be to have the most properties you can remove from the bank so they are 100% yours to do with them what you like (freehold).
Now when Julie and her husband do decide to sell the property, the cash from the sale will stay in their bank account, to spend on grandkids and holidays as they see fit.
They got the peace of mind working with an expert and talked about different scenarios for the future. Now they can control how much they work because there is not as much of a worry about the debts and they can go about life at their own pace. This was done easily before they stopped working and becomes much harder with less income.
