The One Bank Trap and The Several Bank Nightmare

Date Published: 5 January 2024

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.

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