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In my line of work, and particularly with Hudson Financial Planning’s business structure, I get to speak to so many different people every single day with varying circumstances – all with their own ideas regarding their investment arrangements.
One of these ideas that I hear often is this unsubstantiated need for individuals to spread their borrowings via several different financial institutions. The comment I most often hear is that Hudson members wish to “diversify” and “not have all their eggs in one basket”.
Ordinarily, diversifying across banks to reduce a perceived risk is quite unnecessary. As a matter of fact, Australia’s banking sector is rated one of the safest in the world by leading credit agencies including Moody’s, Fitch and Standard and Poor’s. The Big Four (CBA, ANZ, NAB and WBC) have AA- ratings*. These four banks are among a select few in the world with this rating.
In addition, diversity amongst banks can be a delusion. As an example, Westpac owns St George and Rams, BankSA and Bank of Melbourne, CBA owns Bankwest and Aussie, NAB owns UBank, NAB broker and Homeside, Bank of Queensland owns Virgin Money and Bendigo Bank owns Adelaide Bank. Not so diversified anymore, right?
Only yesterday I was speaking to a valued Hudson member – let’s call him José – with $2million+ in investment lending across no less than 5 different financial institutions. In fact, he inspired this Hudson Report, so a shout out to him. Granted, this member has structured some of his investments within a Trust which does add a layer of complexity – however, not to the extent of needing to go to the extremes he has gone to at the expense of higher interest rates. Yes, José also has interest rates across all of his investment loans averaging approximately 4.50% per annum (highest 5.49% and the lowest 4.39%) in the current low interest rate environment where someone like him can easily achieve investment interest rates of sub 4%. A quick calculation if his rates were to go from 4.50% to 4.00% on borrowings of $2million is akin to $10K per annum. $10,000 a year!
On his level of borrowings, the interest rates he is currently paying are unacceptable and unlikely to move substantially by simply asking your local “Platinum Personal Banker” (translation: fancy titled bank employee designed to make you feel important). José did indeed seek to lower his rates by going direct to said Platinum Personal Banker, and was told that given his level of borrowings the bank could lower his interest rates by a whopping 1%! Awesome! Unfortunately, what was lost in translation was the fact that this 1% discount was not a reduction of his current interest rate, but more likely a reduction off the current standard variable interest rate (by the way, nobody ever pays the standard rate).
José needs to speak to a mortgage broker. More specifically, Hudson Financial Planning’s experienced mortgage broker, Matthew Kerr. Mortgage brokers have access to numerous bank policies and are not aligned with one particular bank, which gives them the edge. By consolidating lending with a single bank, you are entitled to a larger than average interest rate discount. The more lending you have with one bank (capped, of course), the bigger the discount you receive off the standard variable rate.
As is the case with most things, there are exceptions. Times that may warrant diversification across lenders may include:
- When the policy of one bank prevents you from doing what you need to do. Bank policy varies from lender to lender so an alternative bank may be required if your current lender doesn’t have a policy to enable you to do what you need do
- If you have reached the maximum exposure level with your bank. With smaller banks, this maximum exposure could be as little as $1million, hence the need to engage additional lenders
- At the time that additional finance is required, a great deal may have been sourced from an alternative lender that you simply can’t refuse
In times gone by, many a wealth creation specialist encouraged spreading debt as a way to protect against banks gaining access to your whole portfolio if anything went awry – given that, historically, investment debt was not regulated. However, today, all debt on property is regulated by the Consumer Credit Code which provides protection to the consumer (for example, if one falls behind in repayments, the bank is obliged to work with you to rectify the situation).
At the end of the day, having your borrowings spread across several banks is not protecting you – it is only costing you money.
*As at 7 July 2016
SMSFA findings – see research on desktop.
Comfortable – $58,922 pa rate or pension
Typical – $70K pa
Aspirational – $100K pa