A common phrase in mortgage world is the “one bank trap”. It’s when you have all your lending with one bank which gives the policy makers at the bank all the power and lowers your negotiating power. If the bank’s policy changes, all your investment eggs are in the same basket.
But if you spread yourself too thin, you create a different type of nightmare.
Let’s use Joe Bloggs as an example. Let’s say he has 5 investment properties with $1.5m of mortgages. For this simple example, let’s say he has no personal debt. How should he spread his mortgages?
The One Bank Trap theory says that if all his debt is with one bank he’s exposed to their rates and their rules. He also can’t play the other banks off against each other.
But lets look at the other extreme. Spreading his 5 properties across 5 banks means he could give each bank $300k debt each (assuming all properties are equal value). But this means each bank is hardly making any money on their slice of the mortgage. He also now has 5 internet logins and a large stack of eftpos cards in his wallet.
My general rule of thumb is to give a bank around $1m of lending and then look around for another bank. In this case he might give the first bank 3 properties and $900k of lending. This would certainly put him in the “preferred category” and would also mean he is likely to get the best rates.
He can then diversify the rest of his borrowing to a second bank. He might give them $600k and using the first bank’s rates to negotiate the second bank lower.
In summary, become a premium client with one bank by borrowing more than, or close to, $1m. Once you’re there, begin to diversify. Don’t get too hung up on the One Bank Trap before you need to.
It’s not always easy to get started. What do you need to know?
We’ve put together the most important things to know when you’re looking at buying your next Investment Property and we are giving it away for free.
If you happen to be a salary earner, proving your income is relatively easy. As long as your Employer issues decent quality Payslips, you can provide the 3 most recent…
The banks are currently overwhelmed by hardship applications as a result of the Level 4 lockdown for Covid-19. In this article we look at what your options are and why…
Article current as of 1st April 2020 (no April Fools jokes are contained – all information accurate) With the recent announcements with bank relief packages and mortgage holidays, we are…
Previously, we’ve looked at the difference between First Home Grants and KiwiSaver. Another often confused, pairing is the First Home Loan (previously known as the Welcome Home Loan) facility and…