A man watched in horror as $35,000 in his savings account vanished before his eyes… and it could happen to anyone.
It was late Friday afternoon in November last year, my now client, let’s call him “Peter Jones”, was sitting at his PC moving the proceeds of a recent property sale, when suddenly, before his eyes the remaining cash in his savings account, $35,418.27 was reduced to 10 cents in an instant.
Panicked that his bank account had been hacked he phoned his private banker.
To his horror he discovered it was his private banker who, without warning, had moved his money out of reach… and he was legally entitled to do so.
The shocking truth is that the way in which most property investors structure their finances, leaves them vulnerable to their bank exercising its right under the All Monies Mortgage Clause.
Let’s retrace "Peter" and his wife "Leanne's" steps to see how this happened…and how it could happen to anyone
The Jones' had been very, very successful property investors. Under the guidance of a "celebrity" advisor they had built quite a portfolio, including a nice home and five properties. With loans of over $2.5M and a family income of over $300,000 they were valued clients of their lender. Life was great.
One day a mortgage broker came to them with an incredible offer from a rival bank, an unprecedented 1.1% off the standard rate; all they had to do was refinance all their loans. With savings of over $25,000 pa they readily agreed.
Rated as AAA clients, a private banker was appointed to look after them and all their financial needs. They enjoyed this elevated status.
A year later they applied for a construction loan to build their dream home. The new bank agreed but it couldn't be done at the same discounted rate, it could only be done at the standard 0.7% discount. While this would be a stretch they agreed, they had gone too far to stop now.
Little did they realize their financial world was about to unravel.
Plagued by delays and cost overruns "Peter" asked his Private Banker for a$200,000 increase… to his horror his request was refused.
Shocked, they scrambled to find the money to finish their new home, they used all their savings and buffers but still they were $80,000 short so they made the fateful decision to draw on their credit cards.
Worse was to come...
Their ‘magnificent’ new home was a ‘lemon’; the roof leaked, their $100,000 motorised window coverings failed, the cellar filled with water every time it rained, the list went on. They contacted the builder, he had gone broke.
Suddenly, despite their substantial income they found they could barely meet the minimum payments on their now huge credit card debt.
Last September they were at risk of defaulting on their loans so they decided to sell their new home but found "fault disclosure" laws made it unsellable.
With no real prospect of a substantial lift in top-end apartment values any time soon, they had to absorb a $300,000 loss on the $1.25M penthouse that had been hemorrhaging over $35,000 each year for 6 years.
Urgently The Jones' sought the deposit monies from the real estate agent, which they put into an offset account to cut their interest costs.
Upon receiving the deposit monies "Peter" immediately started transferring the maximum $20,000 per day to pay down their bulging credit card debt to cut the huge interest costs.
Fast forward to that fateful day in November...
"Peter" was about hit the ‘OK’ button on the second last $20,000 transfer when his savings balance dissolved right in front of his eyes, panic set in.
Using the All Monies Mortgage clause provisions, his banker demanded all the deposit monies be returned. Unable to do so the banker slashed the Jones' limits and applied penalty interest rates.
Suddenly their interest rates were way above the standard rate; blowing their cashflow out of the water and putting their whole portfolio at risk, something unimaginable just a few months earlier.
Suddenly The Jones’ were dropped from AAA clients and relegated to “D” class status... and no personal banker!
The saddest part of this story is that all of this could have been avoided.
Well structured finance and quality advice could have averted this catastrophe entirely.
Not long after this event, The Jones’ came to me for help. We are now in the process of rebuilding their shattered finances and they will come out stronger and wiser for the experience.
In the next article, I will explain what the bank did, why they did it, and how you can protect yourself and your investments from the same fate.