better banking

Selling property to release capital

27 Aug 2014

If you sell a property which is security for a loan, you can usually keep whatever money is left over after the loan is repaid.  However, the situation is more complicated if you have more than one property that is used as security for one or more loans.

In these circumstances customers sometimes complain the bank is not prepared to let them keep as much money from the sale of a property as they would like.

 

How can my bank ask me to repay more than I owe on a property sold?

When a customer borrows money for the purchase of property, the loan is usually secured by an "all obligations" mortgage over the property.  “All obligations” means the property is security for any existing and future lending with that bank, not just the loan for the property in question. This enables the bank to require you to repay more than you have borrowed on the property you have sold. 

Example: You have two properties.  Property A has borrowing of $300,000 and Property B has a borrowing of $600,000. Property A sells for $400,000 and you want to repay the $300,000 loan and keep $100,000. The bank, however, requires you to use the sale proceeds to reduce your borrowing to $500,000. 

 

Why might the bank want me to repay more of my lending?

The bank must be satisfied that the remaining property (Property B in the example above) is sufficient security for its remaining lending. This sometimes means the amount owing on the remaining loan or loans needs to be reduced with proceeds from the property sale.

 

When might my bank want me to repay more?

A bank might want you to repay more for a number of reasons, including that:

  • your financial situation may have changed, affecting your ability to make loan repayments
  • property values may have fallen (as experienced during the global financial crisis)
  • the bank may have changed its lending criteria since the loans were approved, for example the lending may no longer meet the bank's loan to value ratio requirements.

 

What should I do if I want to sell a property to release capital?

If you want to sell a property to free up money for your own use, talk to your bank first so you are fully informed about how much of your borrowing it wants to be repaid.   Another point to remember: if a bank requires you to reduce your remaining loans and you have to break a fixed rate loan to do so, you may have to pay an early repayment cost. You can read more on lending in the following quick guides:

Early repayment costs on fixed rate loans

Concerns about lending decisions

Residential loan-to-value lending restrictions

 

Case study

Mr C borrowed money from the bank to buy two rental properties.  His two loans were secured by “all obligations” mortgages over both properties.  The properties were worth a total of $560,000 and he owed the bank $450,000 - a total loan-to-value ratio (LVR) of 80%. 

Mr C was later made redundant and had trouble making repayments. Without consulting the bank, Mr C sold a property to repay the $150,000 loan taken out to buy it to free up capital. 

He sold the property for $260,000 and expected to keep about $110,000 after the $150,000 loan was repaid. 

However, the bank sent Mr C's lawyer a settlement statement instructing him to repay $210,000, leaving him with only $50,000.

Mr C complained to us because he was in financial difficulty and had sold the property because he thought he would get $110,000 to repay other debts and cover living expenses.  He explained he would not have sold the property to only get $50,000 of the proceeds.

The bank required $210,000 to reduce his total lending because it was losing some of its security through the property sale and it was not satisfied the remaining property was sufficient security for the other loan. 

To ensure it still had an 80%* LVR over the remaining $300,000 property it needed to reduce total lending to $240,000.  We explained that because the bank had an “all obligations” mortgage over the property, it was entitled to do this.  We could not, therefore, uphold Mr C's complaint.

*80% is an example only.  Different lenders have different LVR policies.

 

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