There are so many things to consider when you’re looking for an investment property. Are you going to buy a residential or commercial property? What suburb will you invest in? Do you have enough equity in your home to use when buying the place? What you may not think about is whether all of your loans should be with one lender. There are pros and cons to having your loans with one lender or choosing a different lender altogether. We’ll look at both of these below and help you make an informed financial decision when choosing your perfect investment property.
Borrowing from the same lender
It might make sense to finance your next property through the same lender you’re currently using. They know who you are and will have your details on file and they know that you’re a solid option.
Inovayt Broker and Business Developer Martin Vidakovic says, “Borrowing from the same lender for multiple properties may mean you’re entitled to an additional interest rate discount from that lender as you are borrowing more money in total. That makes you a more attractive proposition for that lender.”
Having multiple loans from the same lender is convenient for internet banking and being able to access everything in one place. A lot of people also have the mindset of; “Well, we’re already here so we may as well use the same bank.”
Martin also mentions that it is quite common practice for people to have their home loan and one investment property loan through the same lender. It isn’t until there are multiple investment properties with the same lender that there can be a knock-on effect if things start to go wrong.
Martin says, “A major factor to take into consideration is that by having all your properties with the same lender, you are basically putting all your eggs in one basket.”
By having your mortgage and investment property loans through the same lender, there are greater risks if you default on a payment. If the lender chooses to seize a property to pay back the loan, they tend to go for the highest valued property which is (generally) your own home. The more property loans you have with the same bank, the greater the risk becomes; therefore, it makes sense to spread that risk across multiple lenders.
Borrowing from different lenders
Choosing to borrow or have loans with multiple lenders minimises your risk. “If something goes wrong with one property, you can sell another one quickly, and pay off the loan relating to that property without it compromising your other loans,” says Martin.
He stresses that the point of having different lenders for individual investment properties is to stop any contagion effect on other properties (including your own home) in your portfolio. The Australian Property Investor says that “having a spread of multiple lenders across your property portfolio allows you to keep them all on a ‘need to know basis.’ For instance, if you get into cashflow issues and are falling behind in repayments for one of your properties, only the bank that has security over this property would be aware of this.”
Having access to multiple lenders will also allow you to have more choice and control of your investment portfolio when you want to release equity for your next investment.
For instance – when releasing equity, if all of your properties are tied in with one lender, that lender may want you to complete a valuation on all the properties in the portfolio which can result in additional costs. Whereas if you have a stand-alone investment with one lender, you will only need to value the property held with that lender.
Different lenders also have different borrowing capacity calculations which may see you being able to borrow more with an alternative lender and building on your portfolio.
Martin advises you keep in mind that while having multiple loans through different lenders doesn’t affect your credit score, applying for multiple loans through different lenders can. Having multiple hard inquiries within a short period of time can be predictive of credit risk, so having too many inquiries for different types of credit can result in a lower credit score. By applying and getting accepted for the same loan amount with different lenders, your credit score will take a hit-making you less favourable looking to lenders. You might be thinking, “I got approved though, how does this impact me negatively?” This is a red flag to lenders. Statistics show people with more credit inquiries are more likely to declare bankruptcy, meaning creditors are at risk of losing their money… so credit inquiries, particularly all at once can be a red flag. While it’s a good idea to shop around, it’s best to chat with a finance professional before making any applications.
So, what’s the verdict?
Like with any decision, there are different pros and cons to weigh up. While having all loans with the same lender may give you the opportunity to access special deals or discounts, it also puts you in a risky position if something were to go wrong and you were to default on a payment. Spreading your portfolio between multiple lenders allows you to not put all of your eggs (or lenders!) in one basket, thereby minimising your risk. When you do have a lender, you are still able to look around at other options and if you find a lender that has a better offer to the one you’ve got, you can refinance and change lenders or consolidate your loans with one lender. Keep in mind, though, there are often bank fees for these types of changes.
If you need any help on what decision is right for you and your situation, get in touch with one of our brokers today.