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LOC annual review - Mortgage Debenture

Discussion in 'Finance & Banking' started by salsa, 8th Feb, 2007.

  1. salsa

    salsa Well-Known Member

    Joined:
    23rd Oct, 2005
    Posts:
    49
    Location:
    Brisbane
    Hi all,

    Would appreciate your opinion on this, particularly from our good brokers and gurus. Which bank ?

    We currently have a big loan with big bank A for our 3 IPs . The IPs are under a DT with company trustee , we (my partner & I ) are directors. The security for the loan is :
    mortgage on the IPs
    and Mortgage Debenture on the company trustee.

    We are in the process of organising a LOC against the equity of out PPOR.
    PPOR in under our names. We currently have 2 offers one from bank A and one from bank B.

    • Bank A offers a LOC 150K more than bank B with annual review. When I asked the banker what the annual review was for the banker said :
    “basically it means that we speak to you on an annual basis to ensure that you are still happy with the facility. If you are then we just leave it as it is. If you don't like the facility then we will try to find something that is more suitable for you.”
    is this for real ??

    • Bank B offers 150 K less than bank A but the LOC will be independent from bank A. Rates and fees are not as good as A but not by a great deal . Review in 3 years not annual.

    Obviously I would like to take the offer of a bigger LOC from bank A, but not if it is associated with more risks since all my loans are with the same bank, and not sure about the impact of the annual review.

    Would you go for bank A or bank B if were in our shoes ? Have any experience with annual review of LOC ?
    Thanks for any thoughts.
     
  2. Nigel Ward

    Nigel Ward Team InvestEd

    Joined:
    10th Jun, 2005
    Posts:
    1,172
    Without having read your loan documentation (which is obviously something you need to do very carefully) in my experience the banker is talking complete rubbish.

    Subject to annual review means that the facility is, basically on demand. At the annual review they can call in the loan, period. Bit of a problem if you've already spent it on some illiquid asset like the deposit for your next IP :eek: :mad: .

    In practice you'll probably be fine and sail through an annual review without even realising one was done...but it's a risk!

    If you can get the banker to put in writing exactly what he said to you and agree that notwithstanding anything in the loan documents that that's the rule, then maybe go with it. Bear in mind that the loan docs will probably have an "entire agreement" clause in it which says that it doesn't matter what the bank has told you, the bits of paper you're signing are the WHOLE of the deal and you haven't relied on anything they've told you...

    Salsa, I'm troubled by the whole thing... :( You need to probe them on what it means and get them to commit to it. I suspect if you put your banker on the spot and then showed his or her manager what the response was they'd get their behinds kicked for saying what you've just relayed...

    N
     
  3. salsa

    salsa Well-Known Member

    Joined:
    23rd Oct, 2005
    Posts:
    49
    Location:
    Brisbane
    Thanks Nigel.
    Having the same thought, this afternoon I asked the banker to document what he has said as part of the contract.
    He pointed out to me that the annual review was a standard condition of this LOC facility and is already documented in the pre-printed booklet. Certainly the explanation of "annual review" in the booklet is not at all what he has quoted. As you said, it was for the bank to re-evaluate my financial status....

    To the forumites who have LOC, how often does your bank review your LOC ? what is the norm ? Has anyone had bad review ? for examples had to repay LOC as the result of a LOC review ?
    Thank you.
     
  4. Simon Hampel

    Simon Hampel Co-founder Staff Member

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    Location:
    Sydney, Australia
    Do you actually need a LOC ?

    Why not just get a standard IO "top up " loan ? Means you don't get the flexibility of a LOC, but they are generally cheaper and easier and review-free.

    I've never actually used a LOC myself.
     
  5. salsa

    salsa Well-Known Member

    Joined:
    23rd Oct, 2005
    Posts:
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    Location:
    Brisbane
    Thank you, I appreciate all the responses.

    If reviews are bad news, 3 yearly review is a bit less risky than annual but not hugely different me think. Does any bank offer LOC with no periodic review or 5- yearly review ? I am a bit confused as I thought all/most good brokers here and on SS as well as investors were pro the use of LOC ?

    Sim, the current offered variable rate fr. bank A is 7.44 which I thought quite reasonable. Good question "why use LOC not the top up IO loan", I must go back to the bank and ask if they could give me same amount under a top up IO ?

    Thanks again for your help.
     
  6. Redwing

    Redwing Well-Known Member

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    476
    Location:
    PERTH..WA
    I was surprised that you can use another Bank......Hmmm food for thought; thanks Salsa :)

    Re: LOC I thought the main benefit was that you can capitalise the Interest?
     
  7. salsa

    salsa Well-Known Member

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    23rd Oct, 2005
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    Location:
    Brisbane