Don’t get your Loans Serviced By a Single Lender
In an article for the website Property Update, Andrew Mirams writes about the amount of security you should be ready to pledge to your lender. It is important to be in control of one’s assets but investors are often swept away by clauses and covenants and offer more than their portfolio can risk.
Cross-collateralising properties
It is one thing to provide collateral to banks and quite another to get trapped in their complex negotiation structures. Mirams talks about the need to completely avoid cross-securitisation of properties. Your mortgage structure should be such that in the event of a default your lending institution gets hold of the property used as mortgage collateral; and nothing more than that.
Use multiple lenders
He also advises that you use multiple lenders to service your loans in order to alleviate the risk your portfolio is at. The banks are there to do business and they will definitely look to attach as much as they can as collateral. So you have got to play shrewdly!
Keep loan terms short
Investors believe that longer loan terms make monthly mortgage figures easier. True! Yet, longer contracts also mean you have lesser room for evaluation and re-strategising your portfolio and securities. It is like playing into the hands of the banking institutions.
Refrain from personal guarantees
In no situation should you expose yourself with a personal guarantee. In the bid to grab a property, we often come up with insane guarantees- for instance; getting a collateral arrangement guaranteed by our spouses who have nothing to do with our business- but this can come to bite us on a later day. If we default, banks won’t cut us any slack.
Figure out the clauses and covenants in detail
It is worth taking note of each clause and covenant of your loan arrangement. To a layman, the idea of a loan default is simple. We default on a mortgage when we do not meet monthly repayments. Investors should however know, contests Mirams, that it is not all this simple. Even if your rental income falls below a certain mark or your asset gets valued for less than what it was valued at during the loan arrangement, you can have your contract terminated. In this regard, sadly, the banks have plenipotentiary powers.
You can read the original article here.
Nice article!
If you service your loan through one lender, you give them access to the equity you have built across your portfolio. In my opinion, “multiple lenders” is the way to go ahead. This way, you can release equity from a property that has exhibited maximum capital gains.
If your assets are tied with one single lender, you may find problem in fetching an easy mortgage insurance premium because your lender will charge premium not only for the property in question but for all the properties of your portfolio they have access to.
Not a worthwhile proposition one supposes!
Is your loan arrangement long term in nature? Does it give you enough flexibility?
