Double loan trouble

Photo / NZ Herald

Cash-strapped investors selling up are getting a nasty shock when hardball banks won't discharge their mortgage - or take their sale profits as a condition.

Investors with more than one property mortgaged to the same bank - one of which is likely to be their home - are striking trouble when trying to free up cash. They sell a property in which they have good equity, only to find the bank demands the entire sum to reduce the investor's other debt.

Claire Mathews, of Massey University's Banking Studies Department, says investors think the amount they borrowed to buy a property is the amount the bank will require to discharge the loan.

However where a borrower has more than one property mortgaged to the same bank, standard mortgage agreements tie together all borrowings and all properties over which the bank has mortgages.

So the bank can require more of the sale proceeds than just the amount the investor borrowed to buy the property before it will agree to discharge the mortgage.

At present, banks are more likely to require all of the sale proceeds because of concern over falling property values.

Property mentor Dean Letfus says where there's more than one loan, the banks are taking every opportunity to reduce their exposure, sometimes leaving the investor in a worse cash position than if they'd held on to the property.

Mortgage broker Mark Jurgeleit says few borrowers read and understand the mortgage document and even many lawyers gloss over it, referring to "standard terms and conditions".

"It's a cautionary tale for investors," says Mathews. It's also the reason brokers may recommend investors don't finance more than two properties with the same lender, instead spreading their borrowings to avoid these risks.

Jurgeleit says banks can change their policies and procedures whenever they want, instantly tightening or loosening lending criteria. If a borrower has two properties financed at one bank and sells one, the bank can ask for a revaluation of the remaining security and demand a reduction in its loan-to-value ratio.

It is not only investors getting caught out by increasingly conservative banks changing their practices.

Struggling home owners hoping to ease their financial position by re-fixing their mortgage at a lower interest rate and capitalising the break fee to their loan have been getting unpleasant surprises, too.

Banks won't automatically let borrowers add the break fee to the loan, even where this wouldn't affect the bank's position. Instead they can make the customer re-apply for a loan - and may then turn them down.

Property lawyer Tim Jones of Glaister Ennor says: "I think it's very bad because banks suck people in to reapply and they will then turn you down and leave you to try to find funding somewhere else. It's pretty horrible stuff."

Ennor says banks do this where they can't otherwise call in the loan but they aren't comfortable with the amount of equity the borrower has in the property, since they've become "very aggressive" in the past 18 months. Effectively, a borrower can be forced to sell.