#2 Split Banking

Split Banking

Here’s the second strategy to help you master your mortgage – Split Banking.

Or is I like to call it cheating on your bank.

While I could explain the technical details of how this works (and why it’s essential).

Here are two case studies to help explain what split banking is and how you can use it to future-proof yourself.

The Grinch Bank that Stole Christmas

This case study will make your stomach churn …

I was working with a pair of Wellington-based investors.

They’d bought 3 investment properties, grown their wealth and now were ready to retire.

They’d cashed in their KiwiSavers and written their resignation letters to leave their jobs.

They planned to sell 1 of their 3 properties and live off the money (the ‘sale proceeds’) and the government superannuation.

So they sold their first property and were set for a comfortable retirement.

Then what happened? 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 2 other properties.

Now, these 2 other rental properties were both cashflow positive. (The rent covered the mortgage and expenses).But, under the bank’s strict test conditions, things looked different.

They had lots of money … but their only income was (now) NZ super. So the bank didn’t think they could afford the debt.

So, without asking, 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.

All the week before Christmas.

Ho, ho, ho.

Unfortunately, this was before split banking was a thing.

If the couple was retiring today, their mortgage adviser would recommend split banking BEFORE leaving their jobs.

They’d still trigger a credit assessment, but this would happen before their income drops (once they retire).

If they’d moved to a multi-bank structure, they could still sell the property.

But since the new bank would only have 1 of their mortgages, the couple could keep the money separate. That way, they could decide how they use themselves.

This is all technical and can be complicated. But don’t let the detail distract you from the message – using multiple banks can give you more control over your finances.

Keep growing a property portfolio with split banking

Split banking is also essential if you’re investing in New Builds.

New builds only require a 20% deposit, compared to the 40% needed for existing properties.

So, if you’re borrowing against your home for that deposit, you only need a little bit of useable equity.

But, after you pay for the property (what property people call ‘settlement’), your new build isn’t a new build anymore.

At least not in the bank's eyes.

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.

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).

With your ‘New Build’ sucking more useable equity out of your main home … you might not be able to purchase your next investment property.

But things would be different if you used two banks (split banking).

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.

This can make it easier when you come to buy your next investment property.

Time to have a financial affair with a different bank?

Split banking is my favourite strategy.

But, I should mention that split banking isn’t possible for everyone (at least, perhaps not right away).

That’s because when you use 2 banks, you’ve got to meet both of their credit criteria.

But don’t worry, if you can’t set it up immediately, you can put it in place later.

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.

Because this strategy can be (seriously) life-changing.

Or, as I say to my clients – ‘life’s short – have a financial affair!’