Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
The Banks’
Secret Weapon
Special Report on the
All Monies Mortgage Clause
By Andrew Gardner
Investors Edge Finance
www.investorsedgefinance.com.au
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
2
The Bank’s Secret Weapon
Property investors Gordon and Sally Jones are about to lose everything, their home, their three
investment properties, and potentially their marriage; if only they’d been advised on how to
protect their home from the bank when they set their loan up.
You see, their bank, like all lenders, has an insidious ‘secret weapon’ embedded in their legal
documents, it’s called the “All Monies Mortgage Clause” (AMMC) and it puts them in a
commanding position.
So how did Gordon and Sally get themselves into this position?
Years ago, Gordon got a loan from his local bank manager to buy his own home. About five years
ago, after marrying Sally, they decided to buy some investment properties. So, like most property
investors, they went back to their bank manager who happily arranged a loan for “106% of the
purchase price” for each of the properties, to cover costs and deposits.
“Fantastic”, they thought, “Just like we heard at all those seminars - build a property empire using
none of your own money!”
After hearing about the dangers of cross collateralisation from a mate, Gordon insisted on each loan
being “stand-alone” and his bank manager happily obliged.
What Gordon didn’t know was that cross collateralisation was to be the least of his worries. It was
the AMMC that was to be his downfall. His unawareness sowed the seed for today’s catastrophe.
Let’s look at how his bank manager explained the setup of his loans.
You might be thinking that this all looks fine - so where is the problem?
The AMMC threat is subtle and poses no immediate threat; the menace can lay dormant for years,
but it does give the bank the means to foreclose almost at will.
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
3
Real finance structuring tactics
The way in which their bank structured their loans is actually quite different from the structure
illustrated in the first diagram above.
In reality, the bank, which already held the title to Gordon’s home, had simply thrown a net around
his home and their investment properties to ‘jointly and severally’ secure the total debt. That’s
right: the bank now has the right under the AMMC to foreclose on any or all of the properties to
repay all loans.
The bank has actually ‘stripped’ equity from their family home and applied it to the purchase of
their investment properties in what is known as an ‘equity transfer’.
Equity transfers are standard banking practice and have enabled mum and dad investors across the
country to build a property portfolio, but it has also exposed them to unnecessary dangers. More
about that and how to avoid the traps later...
Banks won’t lend 106% of the purchase price against a property without a much higher interest rate
and a huge mortgage insurance fee (which, by the way, only covers the lender… not you - you pay
the premium for their peace of mind!)
As you can see in the diagram below, the bank has actually stripped a whopping $273,000 from
Gordon’s home to secure the loans used to fund the purchases of their investment properties.
Unbeknown to Gordon and Sally, the loans on their investment properties are actually limited to
80% of the value of each property, (80% LVR), a comfortable $1.25 security for every $1 borrowed.
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
4
To meet Gordon’s demand for stand-alone loans, the bank simply split the loans into deductible and
non-deductible sub accounts.
Their bank stripped $273,000 from the equity Gordon had in his home to cover his 20% ‘hurt money’
he and Sally were (unwittingly) required to contribute, plus purchase costs. They were totally misled
into believing the bank was actually lending 106% against the investment properties.
But it gets worse for Gordon and Sally, much worse.
Under the AMMC, the family home’s ‘exposure to debt’ (that is the debt their home is liable for),
rocketed from $325,000 to a massive $1.438M, nearly 60% higher than the value of his home.
Gordon had no awareness of what the bank had done, and neither do most investors who borrow
money for investments with the same lender as they have for their home.
Suddenly their home is at the mercy of the bank, and they had no idea as the bank manager had
never explained the effect AMMC could have on their own home. Little wonder, a recent survey of
bank managers found that less than 25% of them understood the full implications of the AMMC for
the borrower; many more didn’t even know it existed! How frightening is that?
So, what triggered Gordon and Sally’s catastrophe?
Life had been pretty good for Gordon and Sally, so they decided he would take his long service leave
so they could travel for three months.
Gordon arranged direct debits from their savings account to cover the repayment shortfall after
rent.
It was while Gordon and Sally were overseas that disaster struck. One of their tenants lost his job
and missed a rental payment creating a shortfall in the repayment of $1170. The bank automatically
issued a default notice demanding immediate payment.
Unaware of the events that were unfolding at home, Gordon and Sally were trekking towards “Base
Camp” in the Himalayas.
Six weeks later they arrived home, exhausted, but exhilarated from their epic journey. The next day
they started to wade through the mountain of mail that had accumulated over the two months
they’d been away.
Upon tearing open the first of a number of letters from Gordon’s bank, his blood ran cold as he
scanned the headline “Notice of Default”. He scrambled to rip open a second letter from his bank as
beads of sweat appeared on his forehead. This time the headline in red screamed “Letter of
Demand – immediate payment required.”
By now their loan was two months in default and the third repayment was due in just 5 days.
Terror set in as Gordon scrambled to find the statement for their savings account. He found it was
overdrawn by $2,751.28. He then fumbled to find their credit card statement; it was just shy of its
limit.
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
5
Including default interest, they were now nearly $4,500 behind in payments. Their savings account
was overdrawn and their credit card was nearly ‘maxed out’. They needed over $7,000
immediately. Where were they going to find that sort of money?
Their loans were now in default. If all requirements of the order were not met within 28 days, the
provisions of the All Monies Mortgage Clause provided that ALL loans would be ‘deemed’ to be in
default and would be called up or action taken to sell any or all of the securities (properties),
including their home, to recover any outstanding loans. Remember, the bank is exposed to a single
client for in excess of $1.4M, so alarm bells were ringing… and loudly.
Gordon and Sally’s predicament was now dire. It proved impossible to liquidate these investment
properties within 28 days and equally impossible to secure new finance while in default.
One tenant losing his job had cost Gordon and Sally their $1.9M portfolio, including the family
home, in just a few short months.
The worst was to come… their relationship was at breaking point as they faced their financial ruin.
Gordon and Sally’s Grave Mistakes
None of this had to happen.
This whole tragic scenario could have been avoided if only Gordon and Sally had sat down with a
financier who was skilled in correctly structuring finance for property investors.
They had made many financing errors, but it was three key mistakes that lead to this disaster:
1. They gave the bank financing their investments access to their home as joint security –
albeit, they had no idea they had done so.
2. They had not allowed for a safety net for this instance, to cover an interruption of income.
3. Their exposure to a single lender was way too high leading to fast action by their bank to
recover the debt. An “A” class client can very quickly plummet to “D” class.
A skilled “Financial Architect” would have structured his finance to ensure maximum asset
protection, particularly for the family home.
Structuring for Protection
A Financial Architect would have structured Gordon and Sally’s finance to achieve four key
objectives:
1. Provide maximum protection for the family home and key assets
2. Protect and maximise cashflow to prevent a repayment default
3. Preserve and protect tax benefits for the future
4. Maximise returns leading to passive income
Now let’s have a look at how a Financial Architect would have structured Gordon and Sally’s finance.
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
6
Protecting the Home
First and foremost, the home would have been protected. This is achieved by isolating it from the
banks providing the investment loans, virtually negating the dreaded All Monies Mortgage
provisions.
This is done by using a separate lender. The Financial Architect then arranges a “cash transfer” to
fund the “hurt money” and costs. This would have reduced the home’s exposure to debt by about
76% or $840,000.
Under a “cash transfer” the home would be exposed to just $598,000 instead of $1.438M.
Guarding against Default
Secondly, Gordon and Sally would have been provided with a safety net to negate the effect of the
rental default which caused them to default on their loans, putting their home in jeopardy.
If the rent doesn’t come in or there is some other interruption to your income (or you over-spend
on your holidays), you can ride it out until things return to normal. We recommend your buffer
covers you at least 6 months.
Optimising your Returns
Thirdly, there’s only one reason to invest in property... to make money. Everything you do should
revolve around optimising your returns because while you are making money you won’t go broke.
“Washing” all your income through your non-deductible home loan can eliminate your home loan
very quickly, but it must be structured correctly with the right loan products, money flow and
purpose to meet strict tax office rules and court judgements.
Get advice for your situation and circumstances before commencing this strategy.
Why Gordon and Sally’s finance wasn’t structured correctly
1. A lender will always optimise its position, by obtaining and retaining all available properties
to secure the loan. The lender is in a powerful position, while Gordon and Sally are in a weak
position.
2. A bank cannot achieve the best possible position for the borrower, because it requires a
second lender to counter the AMMC.
3. Bank Managers don’t understand the AMMC and the danger it exposes the investor to.
4. A mortgage broker typically won’t structure the finance to give you the safest position
because it is a lot more work for the broker, (not you), to deal with two banks and like most
bank managers, most mortgage brokers do not understand the AMMC and the risk it poses
to you.
Investors Edge Finance
© Andrew Gardner 2007
www.investorsedgefinance.com.au 03 9509 8911
7
How do you know if you are at risk?
For some, you will have experienced an uneasy twitch as you read through the scenario. For others,
you will simply know you are at risk. A simple question to ask yourself:
Are any of your investment loans with the same lender as your home loan? If so, you could face
the same risks Gordon and Sally encountered
What course of action should you take?
a) Make arrangements to review your finance structure with a financier specialising in
structuring investment finance for property investors.
b) Go to www.investorsedgefinance.com.au and complete the “Self Audit” questionnaire and
study the three reports which will be emailed to you.
c) Contact us at Investors Edge Finance and a Financial Architect will conduct a wide ranging
review of all aspects of your property investing structures, strategies, portfolio, goals and
objectives. There is no charge for this consultation.
Call Helen on 03 9509 8911 to arrange an appointment.