Investment Finance

The difference between “investment debt” and “home loan”?

Wednesday, August 25th, 2010

So you have an investment property….do you know the difference between your investment debt and your home loan?

A home loan in this context is your personal, non-deductible home loan, secured by your home. The investment loan is the loan that was used to buy your investment property. The vast majority of property investors use the same lender for their home loan and their investment loan.

Under the provisions of the “all monies mortgage clause” this finance structure exposes the family home to all the debt (both deductible and non-deductible), in doing so place their home at greater risk.

Banks are authorised in certain circumstances to not only sell the investment property but all securities (including the family home) as a consequence of invoking its right to withdraw all funding. What is not usually understood by borrowers is that banks can withdraw all funding not only in the event of the more usual ‘standard’ default (missed payments) but because of a ‘technical’ default brought about by what the banks call a “material adverse change in circumstances” triggering a ‘general’ default.

This circumstance usually leaves a property investor stranded without finance and without the ability to secure finance in time creating a real risk for the entire portfolio.

Protect your family home

Correct structuring can add a layer of protection to the family home (a ‘firewall’) giving the investor options to not only save their home but their portfolio as well.

For more information, check out this post about the banks secret weapon. You don’t want to end up like this!

This is a complex topic, if you would like to discuss it further or you are concerned you are exposed to this risk, don’t hesitate to contact our office.

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