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Check your Loan to Value Ratio before you sell

There has been an unintended consequence with the 2016 introduction of LVR restrictions on investment properties and we had a case recently that I definitely think needs talking about.  

It raises the point "Check your LVR before you sell"

Because a bank cannot exceed 70% LVR for lending on a rental property, it means that if you've got a number of properties and sell one, they may in fact need to take all of the proceeds from that sale to ensure that they are still compliant with the LVR restrictions.

A situation we had recently

A client owned four rental properties.  But no owner occupied property. The total value of all of their properties was around $2million.

Total lending was just under $1.5million.  So they were at about 75% LVR which is very respectable.

They had some issues with a bad tenant so decided to sell one of the properties which was also going to give them some cash to invest in a business.

The property was sold for $450K.  The client had a loan which was used to purchase that property for $300K and assumed that's all they would need to repay the bank... however... To keep compliant with the LVR rules the bank needed to not exceed $1,007,000 in residual lending or at the very least they had an obligation to take all sale proceeds.

The property was sold unconditional and then the client got a bad news call from the lawyer saying that the bank was requesting the entire $450K (less selling fees) to be repaid when that property was sold.

Under the law there was nothing the client could do about it.  So they had lost one of their rental properties but had no cash in hand and no ability to buy in to their business as planned.

This could have been avoided by doing a restructure of some of their lending beforehand and making a plan well ahead of selling.  Perhaps moving some lending and getting a structure which would allow them to carry out their plan.

Something that would definitely help to remove or limit the risk of this would be to split your lending across multiple lenders.  Check out our recent blog on this and get in touch if you'd like us to review your position to protect you from future changes.

The advice here, as always, is to talk to a Mortgage Adviser who is a specialist and has your interests at heart. We can work together with your agent, lawyer and accountant to ensure that although compliant, the best result for you is achieved, not just simply ticking boxes for the bank.

If you've got multiple properties then you could be at risk from this so we'd love to talk to you.  Simply contact us or email office@mymortgage.co.nz

We look forward to hearing from you

Adam, Claire and the My Mortgage team