Protect Your Assets:
Is This Secret Loan Clause Putting Your Assets At Risk?
The most effective property investors always protect the down side before considering the upside. They protect their key assets – especially their jewel in the crown, the family home.
Yet, for most property investors, even seasoned investors, this remains the single most neglected, but most important rule of all.
Consider how most property investors get started. They decide to become a property investor; often after listening to their friends who rode the last property boom.
So, they call their local bank manager who arranged his home loan to find out how much they can borrow.
“No problem,” their bank manager says, “and don’t worry about the deposits or costs, we’ll lend you enough to cover both..”
“Wow!” they think this is great. “Let’s get started.”
Unwittingly, the new investor is about to commit the cardinal sin of investment, a sin they will continue to commit time and time again.
So, what has the investor, who has so enthusiastically set on this journey to wealth, done that is so wrong.
In bank jargon, it’s known as the All Monies Mortgage Clause (AMMC).
The AMMC is menacingly insidious and hangs over the investor’s head, usually until the worst possible moment when the investor is at their most vulnerable.
It’s secret and insidious because very few investors are aware of its existence or its effect.
Investors Edge Finance recently contacted a number of bank managers and found, incredibly, that few of them were aware of this clause which makes it all the more frightening.
The difficulty is its secrecy, because you won’t find a clause called the “All Monies Mortgage Clause”. So, you have do a search and look for phrases which include words such as: ‘trigger a general default’, ‘material adverse change in circumstances’, ‘immediate repayment in full’, ‘you will be required to prove no adverse changes exist’, ‘break of any condition of this agreement’, ‘jointly and severally liable’ and ‘…all of your estate’.
So, what does the AMMC mean and how can the investor protect themselves from its imposition. The AMMC was originally designed to virtually eliminate the risk to the bank and load it on to the investor.
In essence, the clause gives the bank or lender the power to demand all loans be immediately repaid if any term or condition within the huge and complex loan contract is breached, or is liable to be breached.
The effect is to expose every security and savings, including the family home, to the total debt.
This is extremely serious and very dangerous.
Imagine, you buy an investment property and it turns out to be a dud. A default occurs with or without your knowledge including when your bank suspects a material adverse change in your circumstances. Your bank has the right to demand repayment, and in some circumstances to demand immediate repayment.
Your total debt level could, at that time, be well in excess of $1M. Imagine your chances of quickly (or at worst, immediately) securing that amount of finance with a new lender while in default with another lender.
You could lose everything.
But, it doesn’t have to be that way.
Investors Edge Finance has spent years developing and implementing sophisticated finance structures that are designed to virtually bullet proof your home and key assts from the effect of this insidious and unfair loan contract clause.
Pam and I have used Investors Edge to arrange all our investment finance, as they specialise in arranging finance for investors in ways that protect your family home and other assets and maximise the tax advantages. They’ve helped us solve a few really thorny problems along the way so I can’t recommend them too highly. Naturally, there’s no kickback to us for the recommendation.
One of the big issues that Andrew Gardner, one of the principals, first alerted us to was the traps in the All Monies Mortgage Clause - which, as I mentioned last night, involves securing your investment loans against your family home. Andrew and his team are active property investors themselves so they understand the things to look out for and how to get the best returns from your investment.
Barrie Vickers, Lilydale, Victoria
Triggers for All Monies Mortgage Clause:
- Investor buys an investment property at the top of the market (late 2003) Months later, its value has dropped by more than 20%. The bank could invoke the clause under “a material adverse change in circumstances” and demand repayment of loans.
- Investor buys an investment property with a 12 month rental guarantee. The company is wound up and a rental payment is missed. The investor is on holidays and is unaware of the breach. The bank could invoke the clause as a ‘default’ could be deemed to have occurred.
- Investor owns a business; he has a home loan, an investment loan, a business loan and an overdraft, not an uncommon situation for a businessman. A major customer fails pay their account and the business misses a payment. The bank manager has been tracking income and expenditure and found adverse trends. A default has occurred.
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