October saw the new investment property loan-to-value rules come into play (officially), as recently announced by the Reserve Bank. There is a lot of confusion around these borrowing rules and in particular the exemptions.
Remember the following rules are exempt:
- New-builds remain exempt, so investors can still borrow up to 80%. This includes minor dwellings and single subdivisions. Remember ‘off the plans’ and of course ‘Turn Key’ also qualify as ‘new builds’.
- Refinancing existing high LVR loans – if you’ve been reluctant to review the pricing on your >60% LVR investment property loan (or even your >80% owner occupied home loan) don’t be. ‘Like for like’ lending can still be accommodated.
- Re-cladding a leaky property or repairing a home damaged by a natural disaster type event. This can also include bringing your rental up to standard, including installing insulation.
- Bridging finance is also exempt – if you’re planning to buy a new home, this could be helpful because there are so few listings available that you may decide to buy first and sell afterwards.
In this months Post, seeing it’s spring and is supposed to be a busy time for house sales, I want to tackle a situation that some investors may be facing if they are looking at selling, it’s also a question I’ve been asked a few times.
“What happens if an investor has 2 or more properties that are ‘cross collateralised’ (security is tied together) and he or she sells one of them? “
Rumours are banks have been keeping a portion of the funds after settlement!?
Yes in most cases they can and will.
Here is an example of a situation that would trigger this:
John & Mary own 2 Rental Properties valued at say $500k & $600k with a combined Mortgage of $700,000. The Mortgage has both properties down as security e.g ‘cross-collateralised’. This of course implies the loans are with the same bank.
John and Mary decide to sell the lower priced rental for $500k. They wish to use $300k to reduce the loan(s) and keep the remaining $200k for personal use. So they’d then have a $400k Loan on a property worth $600k. Based on the rental return and repayments they are happy with this figure.
But under the new rules their bank won’t let them do this! Their bank will need to retain $40k to reduce their Mortgage to $360,000 = 60% LVR.
Net effect John and Mary will only have $160,000 for personal use Not the intended $200k.
This may or may not be an issue for them but you can agree it’s definitely something that they would have wanted to know before they made a decision to sell.
If you are thinking of selling please be aware and check with your bank on how they would treat you in this situation