Is the bank telling you what to do with ‘your money’?

Lately we’ve been dealing with clients who are miffed that their bank won’t let them use funds they’ve freed up when selling a property from their portfolio. 

There’s a reason for this. To understand why, consider the following hypothetical example:

Imagine you own two properties worth $1.8 million all up. You have total lending against these assets of $400k. So you think, “I have $1.4 million of equity.”

Then you sell one property for $900k. You now have $400,000 of lending against your remaining property, plus the proceeds of the sale. So you think, “I’ve got $900K to give to my kids, buy a new BMW and renovate the family home.”

But the bank may not let you do this. It says you have to put the proceeds of the sale against your mortgage. So you end up with a mortgage-free house, but only $500K of spare cash instead of the hoped-for $900K.

Don’t get angry – it’s not about you. It’s about the rules banks have to follow.

All banks in New Zealand are controlled by the government and the Reserve Bank. They’ve signed up to the Responsible Lenders’ Code, which requires lenders to reassess borrowers’ ability to repay every time they make changes to their loans. 

In our example above, the rules point towards paying down debt rather than letting the borrower spread the cash around. These sort of calculations are triggered every time you change your home loan arrangements. 

So what to do? Get professional advice before you start planning to sell a property, change its ownership status, or change any other detail of your mortgage. Even an application to go ‘interest only’ will trigger this process, because the banks are required to re-assess their customers’ financial status.

It may seem intrusive but it’s the law. The good news is that we’re here to give you a heads-up before you hit a roadblock. And we provide this service for free.