How mortgage advisers can add value
New Zealanders looking to gain more control over their property investments and mortgages might consider a strategy called "split banking”, according to mortgage adviser Peter Norris (pictured above), director of Opes Mortgages.
"Split banking is my favourite strategy," Norris said. "But I should mention that split banking isn't possible for everyone… at least not straight away.”
Split banking, or “cheating on your bank” as Norris calls it, involves dividing your property loan portfolio across multiple banks. This strategy can be particularly beneficial for mortgage advisers to recommend to certain investor clients as highlighted by the two following scenarios:
Case study: The bank who stole Christmas
In one case study, a Wellington-based couple faced a frustrating situation after selling one of their three investment properties.
“They’d cashed in their KiwiSavers and written their resignation letters to leave their jobs,” Norris said. “So, they sold their first property and were set for a comfortable retirement.”
The pair had planned to use the sale proceeds and government superannuation to fund their lifestyle.
That was until selling the property triggered a credit assessment at the bank.
“The bank had to re-run the numbers to see if they could still afford the mortgages for their two other properties,” Norris said. “Now, these two other rental properties were both cashflow-positive. But, under the bank’s strict test conditions, things looked different.”
While they had money, their only source of income was superannuation, and the bank didn’t think they could afford the debt.
Without asking, according to Norris, the bank took the money from the sale and their KiwiSaver and paid down the mortgages on the other two properties.
“On top of that, the bank charged the couple thousands of dollars in break fees … and cancelled their credit cards,” Norris said.
“All the week before Christmas.”
If the couple was retiring today, their mortgage adviser could recommend split banking before leaving their jobs.
While the couple would still trigger a credit assessment, this would happen before their income drops after they retire.
“If they’d moved to a multi-bank structure, they could still sell the property,” said Norris. “But since the new bank would only have one of their mortgages, the couple could keep the money separate. That way, they could decide how they use themselves.”
How split banking helps investors buy new builds
Split banking can also be advantageous for property investors, particularly those looking to acquire new builds.
New Zealand currently offers lower down payment requirements for new-build properties compared to existing ones. For new builds, a buyer only needs a 20% deposit, while existing properties require a 40% deposit.
This means investors can use less of their available equity from their main home when purchasing a new-build property.
However, once the property is purchased and no longer considered a new build, accessing equity for further investment can become more challenging.
“Let’s say you then want to buy another investment property. When you go back to the bank, you’ll trigger a credit assessment, just like our first couple,” Norris said.
“When the bank re-runs the numbers, your new build now requires 40% equity before you can borrow more. This often comes from your home if you’re just using one bank.”
Since the new-build property increases the amount of equity tied up in your primary residence, it may become more challenging to secure financing for your next investment. However, Norris said utilising split banking could offer a solution.
“With two banks, you can set it up so that your new build investment property still only takes a little bit of useable equity from your main home,” Norris said.
“This can make it easier when you come to buy your next investment property.”
How mortgage advisers can add value
While split banking in New Zealand offers potential benefits for property investors, there are also some drawbacks for investors. Fortunately, for mortgage advisers this is where they can add value.
Managing multiple loans across different banks requires more effort and organisation. The investor would need to track deadlines, interest rates, and account details for each bank.
Qualifying for loans from multiple banks can also be challenging. They’d need to meet each bank's individual credit requirements, which may involve stricter income verification or higher credit scores.
While investors are generally cautious in the current market, Norris emphasised the importance of advisers showing value through innovative strategies.
“This is why you’ve got to work with a mortgage adviser who can do the number crunching and tell you what your options are.”
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