New Zealand's government tackles at property speculators with a package of new housing rules to relieve runaway property prices and reduce the risk of a "dangerous" bubble. At the time of writing, it's still early to conclude how the new housing rules impact on the overall New Zealand property market, but definitely some investors could have already been spooked out of the market.

Here is the recap of one of the new housing rules fazing investors:

No interest deductions on residential investment property acquired after 27 March 2021. For the property acquired before 27 March 2021, the interests on the home loan will become progressively non-tax deductible against rental income from 1 October 2021.

As a result, we anticipate that banks are more likely to review their servicing calculator and make it tougher for investors to borrow. This means if you are purchasing an investment property, or purchasing family home but you already have  investment properties, your borrowing capacity may be reduced.

However, we are still seeing that too many borrowers have multiple properties mortgaged to the same bank. Before banks tighten lending rules, we highly recommend reviewing your existing loan structure to avoid the risks that could have been eliminated.

In this article, we'll share one of the most common mistakes people make when borrowing for investment properties – holding multiple property loans with one bank – and discuss the potential risks. Also, at the end of the article, we'll reveal the cost of separating all property loans with different banks to help you weigh up the risks and benefits and make an informed decision.

New housing rules 2021 NZ: Restructure your loan before it’s too late

Video Timeline

1. Under the new housing rules, why should you consider splitting banks strategy? - 01:53

2. How to split property loans with different banks? - 05:21

3. What are the costs involved in splitting banks? - 06:35

1. Under the new housing rules, why should you consider splitting banks strategy?

One common area we see many investors make a mistake is that they tend to start by purchasing their properties and then go straight back to the same bank to fund. In some cases, when multiple property loans secured with one bank, investors can utilise equity built up and get 100% financed.

However, holding multiple property loans with one lender is not the best practice. We recommend adopting a strategy called splitting banks that separating all your property securities with different banks.

We put together the top five reasons why splitting banks strategy is recommended as follows:

(1) Increase your flexibility.

As we expect, banks may review their calculations on investment property income to reflect reduction of cashflow under the new interest deductibility rule. But how each bank will react to this new rule and when their new lending policies will onboard are remaining unknown.

One thing for sure is that lending policies vary from one bank to another. Your borrowing capacity can be different in the eyes of different banks. In other words, if you only stick with one bank, once their lending policy gets tougher, your borrowing capacity could reduce dramatically compared to the structure that you have property secured with different banks.

(2) Your family home is  exposed to your investment debt.

When you have multiple property loans with one lender, if you can't repay your investment loans, your home is at genuine risk because your lender has power over all your assets. They can decide to mortgagee sale your assets with full control over the sale proceeds, deciding which loan is to be repaid and by how much. You could even be forced to sell your family home to recover the remaining loan. These risks are unnecessary as you can still leverage property equity without the cross-securitisation structure.

(3) Take full control of your sale proceeds.

When your lender takes full control over your property security, should you sell down one of your investments, they can decide how much you need to repay from the sale proceeds. Your lender will determine whether the equity level on the remaining security is sufficient – and could also review your borrowing capacity based on your ongoing income. If either test fails, you may end up with higher than expected repayments.

We've seen clients who were forced to pay back full net proceeds to their lender – with nothing left for themselves. If you only have one property with one lender, you pay off the entire loan and keep the remaining net sale proceeds.

(4) Exposed to interest rates rises

Some banks set different pricing for owner-occupied property and investment property. They charge higher interest rates for investment property while other banks treat them the same. With that in mind, if you deal with the wrong bank and have all your property secured with that bank, once they raise their interest rates, you will be potentially paying much more than having the split bank strategy.

(5) Avoid unnecessary guarantees between different borrowing entities

Say you have multiple properties secured with one bank. You may have your family home owned by the family trust and have your investment properties owned by a look-through company (LTC). When they are cross-secured under one lender, your family trust and LTC cross guarantee each other's liabilities. If something happens with the LTC and they are unable to pay the loan, your family home (under the family trust) will be exposed to the real risk of mortgagee sale to satisfy the obligations of the LTC whereas your family trust could have protected your assets.

2. How to split property loans with different banks?

Before starting with splitting your property loans, we highly recommend engaging with an experienced financial advisor for a thorough assessment.

If you decide to work with us, our process is:

Step 1, we'll need to know your financial situation, and assess if it’s possible to split banks.

Step 2, if we think splitting banks is possible, then we will look at how we do it. One of the factors we will take into consideration is your plan, such as "do you have a property to be sold or redeveloped in the near future? If this is the case, we'll try to keep them separate from other properties or even suggest discharge if possible. We take the same approach for your family home, we will look to keep it away from your other properties or discharge whenever possible.

We also look at any other properties that can be discharged. Considering the strong capital growth over the last 12 months, it's very likely you have enough equity, which allows you to discharge one or more properties. So we'll help you review your property portfolio and loan structure, and then come up with a plan that suits your needs.

Overall, it's case by case. We are happy to work with you to understand your situation and plan so that we can come up with a tailored  structure that helps you protect your assets and minimise the impact of future lending rule changes.

3. What are the costs involved in splitting banks?

(1) Solicitor fee

Solicitor fee will incur when discharge or refinancing your mortgage. You'll need to ask your solicitor for more details.

(2) Break cost

If you refinance your loan while it's on fixed term, you'll have to pay a break cost. The easiest way to find out the break cost is just by contacting your bank directly. We can also enquiry it on your behalf. Please note the break cost is only valid for one day, the actual cost may vary on settlement of discharge.

(3) Cashback to be clawed back, if applicable

If you fully repay your loan within your cashback period as a result of refinancing, the bank will ask you to pay back all or a certain percentage of the cashback paid to you at the initial settlement. The cashback claw back period varies from two to four years depending on the bank you deal with.

In some cases, the cashback you'll be getting from your new bank can be enough to cover these costs, but it is not guaranteed. We're happy to look at your case to help you weigh up costs and benefits.

Prosperity Finance - Here to Help

Any questions? Or looking to review your current loans? We’re here to help. Call us at 09 930 8999 to have a no-obligation chat with one of the financial advisors at Prosperity Finance.

Read more:

ANZ tightens servicing for rental property income, will this affect you?

New housing policy 2021: Can investors still afford to hold the properties they have?

How may the removal of interest deductions hurt your borrowing power?

Disclaimer: The content in this article are provided for general situation purpose only. To the extent that any such information, opinions, views and recommendations constitute advice, they do not take into account any person’s particular financial situation or goals and, accordingly, do not constitute personalised financial advice. We therefore recommend that you seek advice from your adviser before taking any action.