AVOIDING THE ONE BANK TRAP

Many property investors understand the requirement to utilize asset protection

structures such as trust to protect their wealth as their equity increases in their
portfolio. However many investors still unnecessarily expose trust assets by using
one bank for all or the majority of their lending.

Also when growing a property portfolio investors will find that as they progress and
take on more debt, lenders will invariably get more difficult to deal with. This issue
can be postponed by spreading debt around several lenders thus putting off
reaching certain lending limits which often trigger more rigorous financial
assessment.

We recommend quarantining your own home with one lender referred to here as
Bank A who you do not look at securing further properties with (with the exception
of a holiday home which if advised should also go inside the same trust as the family
home makes sense to also be secured at this lender). We normally look to set up a
revolving credit facility with Bank A from which deposit funds for investment
purchases can be drawn on (and renovation funds if you are looking to target do-up
type properties). A preapproval is then organized from a second bank referred to
here as Bank B, which will hold security over the investment purchase and who
provides the majority of the funds to complete the purchase. Over time,
appreciation in the property means that equity will build up in the rental and then it
is generally advised that the mortgage should be topped up with bank B and the
funds utilized to reduce the debt on the owner occupied property with Bank A.

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 Note that with the preapproval we are looking to get a preapproval based on the
highest possible Loan to Value Ratio without incurring low equity costs which since
the introduction by the Reserve Bank of the LVR rules on the 1st of October 2013 is
generally 80%. It is important to note here that the type of properties you are
looking at targeting may determine which lender is best to act as Lender A in this
case and also Lender B. As an example one particular lender is useful and often
used as Lender A as they are more willing to enable clients to set up large revolving
credit facilities which is ideal so investors can move quickly when suitable purchases
arise knowing that they have funds in place to act. If an investor planned to target
the apartment market however we would prefer to leave this lender available to act
as Lender B as they have much easier requirements around minimum apartment
size than most other lenders and utilising this lender as Lender A would invariably
put the investor into a situation of having to cross secure their home against their
investments which is what we are aiming to avoid.

Other banks (and potentially second tier lenders) will be approached over time
as a portfolio grows to spread the risk and minimize the chances of hitting a
“lending wall” should one funder tighten their credit criteria substantially. Lenders
do tend to relax and tighten criteria at different times and so it is important not to
have all deposit funds locked up otherwise it can be difficult to continue investing.

The following three pages have diagrams to

further explain this structuring.

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 STANDARD DEBT STRUCTURING
Not recommended

Investment
Purchase

100% Financed

Personal Investment
Home Purchase
Holds Equity 100% Financed

CAPTIAL
Investment
Purchase

100% Financed

Reasons why cross security is not a good option

All debt held with the same bank.
Family home exposed to investment debt.
Bank can decide to keep sales proceeds if any property is sold down
and debt still owed against another property.
Likely to cause borrowing issues at some stage.

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 RECOMMENDED DEBT STRUCTURING
STAGE 1 - Securing Revolving Credit

COMMON MORTGAGE STRUCTURE

Personal
Home $500k property
$400k equity
$100k mortgage
BANK A

RECOMMENDED MORTGAGE STRUCTURE

Personal
Home $500k property
$400k equity
$200k revolving credit put in place for
deposits
BANK A
$100k mortgage

STAGE 2 - Arranging Preapproval

PREAPPROVAL RECOMMENDATIONS
Investment
Property Different lender to BANK A for preapproval.

80% approval ideally organised.

Personal conditional all fulfilled.

BANK B
Only requirements will be property
conditions such as:

Sale & purchase agreement

Rental Assessment
Registered Valuation (sometimes)

Allows purchaser to go unconditional quickly.

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 RECOMMENDED DEBT STRUCTURING
Recommended

STAGE 3 - The Split Banking Strategy

Personal Investment
Home Purchase
Revolving Credit 20% Deposit
80% Financed

BANK A BANK B
20
%
20% Deposit

De
po
sit

Investment
Purchase

80% Financed
Investment
Purchase

80% Financed BANK C

BANK D

Key Points to note with the Split Banking Strategy

Revolving credit funds 20% deposit with 80% coming from other banks
Personal Home is not exposed to Bank B, C or D

Note
If no renovations are undertaken there is generally a 6 month wait before a bank
will be willing to disregard the purchase price and consider a top up against a
higher valuation.

If renovation work is completed, an exception is often made to allow refinancing

much earlier.

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 RECOMMENDED DEBT STRUCTURING
Recommended

STAGE 3 - Releasing New Equity

Personal Investment
Home Purchase
Revolving Credit 20% Deposit
100% Financed

BANK A BANK B
20
%
De
20% Deposit

po
sit

Investment
Purchase

100% Financed
Investment
Purchase

100% Financed BANK B

BANK B

Key Points to note with the Split Banking Strategy

Once there is enough equity in your investment properties Bank B can be
approached to top up further against these to release the equity to pay back
the revolving credit and thus return the equity to the family home.
This makes more funds available for deposits and assists in more
investment purchases.
Your personal home is still not exposed to bank B, C or D
If any bank tightens their lending criteria there is still room to move with
other lenders.

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 ASSET PROTECTION
It is strongly recommended that qualified asset protection experts who understand
both how to protect the assets and how to structure for optimum tax efficiency are
approached. They will then be able to assist in ensuring that the structures will hold
up to a creditor’s challenge and also assist in ensuring that gifting is completed
correctly. We work very closely with New Zealand’s most prominent structuring
experts who we can introduce to you, to ensure the process is correctly put in place
and manage.

As mortgage lenders in New Zealand will always require personal guarantees, it is

advised if someone brings no income benefit to the application that they do not go
on the mortgage as this exposes them to unnecessary risk without any additional
benefit.

HOW TO MAKE THIS WORK FOR YOU

We'll be in touch via email to see how we can help you avoid the One Bank Trap and
improve your asset protection and lending structures. For further assistance you
can contact us at any stage on info@krispedersen.co.nz or 09 476 1199 to speak
with one of our mortgage specialists.

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 ABOUT THE COMPANY
KRIS PEDERSEN - DIRECTOR & ADVISOR

Kris Pedersen founded Kris Pedersen Mortgages in

2007 after realising that the market was lacking
quality financial advice for property investors.

After witnessing many new clients being set up in

ways that were more beneficial for the bank than the
actual clients, Kris set out to change this and quickly
gained a reputation for finding property funding
solutions where others couldn't.

By drawing on his personal property investment knowledge and armed with experi-
ence working at a market leading non-bank lender, Kris developed outside the box
lending structures that allowed more applicants to get deals across the line.

In 2009 Kris and his wife Tennille made the decision to establish Pedersens
Property Management company to best service his clients property management
needs after purchase.

Kris maintains an active role in the New Zealand property market and frequently
speaks at property events around country while regularly being asked to contribute
to the NZ Property Investor Magazine and other publications each month.

Kris stongly believes his clients need to be dealing with specialists, that's why Kris
Pedersen Mortgages offer specialist brokers for First Home Buyers, Commercial
Property & Business Finance and Risk Insurance Cover.

Kris' specialist property team are available to help you whether you're just starting
on the property ladder, are a sophisticated investor, or a large scale property devel-
oper.

Click here to hear from just a few of the happy customers we've been able to help
along the way.

info@krispedersen.co.nz 09 476 1199

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