Property profits controlled by banks

Investors selling property to raise cash are finding banks control what happens to the money, says mortgage broker Sue Tierney.

Tierney, president of the Auckland Property Investors Association, reported three "can you help?" calls from desperate investors in the last month, distraught at the plans their banks had for their money.

The callers were customers of three big banks BNZ, ASB and National Bank. "It's across the board," she said.

In each case, the bank decided part, or all of the net sale proceeds, would be used to reduce the investor's other debts. Those other debts were other mortgages and, in one case, a business debt.

"What you think can happen and what the banks will allow to happen are quite different now," said Tierney.

She said people did not realise mortgage agreements gave lenders a great deal of power, and now the crunch had come, they were using it more frequently.

"One bad example was a client in business. He wanted to sell his home to buy a new one, but the bank wanted to use all the equity from the sale to reduce his business debt.

"That's of particular interest to all the small business owners out there," Tierney said.

Fortunately, the individual in question had signalled to his bank what he wanted to do, and was forewarned, so he decided not to sell. One expat Kiwi called Tierney after selling one of his two New Zealand properties and the bank decided to use the proceeds of the sale to reduce the loan on the other. He had planned to use the money for a down payment on a property in the country he was living, Tierney said.

She said people should not assume the bank will allow them to use the profits of sales as they saw fit, and should never leave themselves beholden to one lender. Those with more than one loan should spread their debt around various lenders so none ended up holding the whip hand.

Tierney's advice is talk to the bank about what you would like to happen and get their approval up front.

Those with big home loans who sell the bach to help reduce their monthly repayments could also find the bank deciding to reduce their home loan with any profits from the bach sale.

A spokesman from one of the big banks told Sunday Star-Times that the banks were keen for borrowers to have more "skin in the game" and when a borrower wanted to "restructure" their affairs, the bank was taking a keener interest in it. In some cases, banks were taking a greater hand in directing what happened to the proceeds of sales.

That was more likely in situations were there was a troubled repayments history, or very large debts, he said.

"If there is a view at the time of restructuring of finances that the situation could be improved in the customer's and the bank's interests in terms of prudence, banks can take a role in directing funds," the spokesman said. "In this environment, that may be happening more frequently."