28 JULY 2022 | IN LENDING
When it comes to building wealth with property investment to reach mortgage and financial freedom, control over your financial situation is key. The problem is when you get money from the bank to buy your rental property, they have a certain amount of decision-making power over your money.
How can you lessen the bank’s control when it comes to investing in property? Split banking is your answer.
Watch Instead: What is split banking?
What is split banking?
Split banking is the method of buying investment properties from different banks, so all your investment properties aren’t with one bank.
Why does split banking matter?
When the bank lends you money for a property, they are always looking to reduce their risk. If you run into any financial problem, the bank has some control over what you do to solve that problem, like looking to the properties you have with them.
For example, let’s say you own two properties with bank A. When you sell one property and if the bank perceives they’re going to be too exposed for their liking, bank A might take some of the money you get from the sell of the property to pay off or pay down the second property.
There goes your plans for that cash windfall.
How does split banking reduce bank control?
When you have multiple investment properties with multiple banks, in the event the bank reassesses your situation, each bank can only make decisions about what you do with the properties that are with them instead of your entire portfolio.
7 Reasons to Buy New Build Investment Property Infographic
What other benefits does split banking have?
Under current LVR rules, if you need to keep 20% equity in your home if you’re buying a new build property. However, once you take possession of the new build property, it becomes an existing house and you’ll need to keep 40% of the equity in your owner-occupied home, which might make it harder to buy the next investment property using equity.
When you use split banking your owner-occupied mortgage would be with a different bank from your new build investment property. Therefore, the properties don’t affect each other, and the two different banks can only consider the houses that they have.
Who is split banking good for?
Split banking is good for people who own more than one investment property and are nearing retirement age, whether it is early or at 65. This is because when you don’t have income from working the bank might try to cease the opportunity to use money from the sale of a property to lessen their risk of you not being able to pay off any debt that you have with them.
Split banking also is great for people who are wanting to add properties to their investment property portfolio.
If you only own your owner-occupied home, split banking isn’t right for you.
Keep in mind this article is providing general information and not individual financial advice.
If you’d like a review of your situation and customized advice for building wealth to reach financial freedom and live a fulfilling life, please book a free 15-min chat.