Be careful what you believe
“Westpac Group, the nation's second largest lender, is giving risky property investors less than a month to find another lender amid growing concerns about the impact of rising rates, falling values and oversupply.” - Source, The Australian Financial Review.
It is disappointing and frustrating to read yet more media fear mongering from a writer who either doesn’t understand enough on the topic, or chooses to miss the facts. But, there is some good lessons to learn for any commercial property investors.
Whilst we haven’t seen one of the letters the story refers to, here’s what we expect are probably the facts:
Since the letter supposedly states “no longer support our COMMERCIAL relationship with you”, combined with the fact that a bank doesn’t have any legal or contractual right to simply call in a home loan just because they don’t like the risk anymore, it seems a pretty safe assumption to make, that the letter refers only to a commercial loan.
Commercial property investment loans usually have loan terms of no more than 5 years, usually 3 (term of 3 years or less provide far lower interest rates to borrowers, for reasons we could rattle on about in a whole blog). Therefore, the most likely reason that a bank would have the right to issue a letter such as this – in the absence of having been pushing the borrower for some time on breached covenants – is because the loan term has come to an expiry. Which then gives the bank the right to not renew.
The reference to 80+% LVRs in the story would therefore seem to be absolute rubbish; if you have a commercial property loan at anywhere near this LVR, there’s fairly good reason for the bank to be wanting to get out, as that’s way above normal commercial LVRs.
So, if you have an investment home loan, simply ignore this article. However, if you have a commercial property loan – with ANY bank – there are some fundamental lessons that apply during any cycle, not just now:
Know when your loan term expires – don’t assume the bank will simply renew it just because you believe they should.
Actively manage loan maturities – talk to your bankers at least 6 months before expiry, to make sure you don’t get any surprises as to their likely expectations. If your banker gives you a simple “don’t worry, it’ll be fine”, don’t take that as a given – push them for more detail (in accordance with credit policy and current appetite!).
If there is any risk that your LVR or Interest/Debt Service Cover Ratios may not meet the bank’s current (or new!) hurdles, take action early. In instances like this, we STRONGLY recommend against just letting your banker order fresh valuations – do that and you’re placing your life in their hands. It’s vital that you manage your own risk before the bank tells you that you have a problem.
If you’re unsure about what risks you may be facing with your commercial property portfolio debts, ask us about how we can help with our debt advisory services (and why we’re different to finance brokers). Contact us direct today for a free and no obligation conversation about your current situation.