Cracks are appearing in the residential investment market, with well-known Sydney investor Nathan Birch sued by his lender after his company defaulted on a $535,000 high-interest mortgage for a Gold Coast investment property.
Mr Birch, who claims to have a net worth of $30 million and earn $500,000 a year after expenses from his portfolio of more than 200 properties, said he had “briefly” fallen behind on “one or two mortgages” because of increased lending restrictions imposed by the Australian Prudential Regulation Authority.
“Most importantly, they’re all paid up now and I’m coming to the end of this challenging year on top of things, still with an ever-growing net worth position,” he told The Australian Financial Review.
A claim filed in the Brisbane District Court by solicitors Dunstan Hardcastle, acting on behalf of Permanent Mortgages (a subsidiary of non-bank lender La Trobe Financial) shows that problems began surfacing for Mr Birch just two months after APRA took action on interest-only lending.
At the end of March last year APRA wrote to all banks, credit unions and building societies telling them they were expected to limit interest-only lending to no more than 30 per cent of all new mortgage lending and impose stricter limits on interest-only loans on loan-to-value ratios above 80 per cent. These measures were in addition to a 10 per cent annual growth limit on investor lending already in place.
Since then investors have quit the housing market in droves, unable to secure funding or meet the new, stricter lending criteria demanded by the banks, paving the way for a correction in property prices that began in the final months of 2017.
Court documents obtained by the Financial Review show that by June 23 Mr Birch’s company HLG One Holdings Pty Ltd had failed to pay amounts owing on a $535,000, 30-year interest-only mortgage for 9 Victor Avenue, Paradise Point, which has three two-bedroom rental units on one title.
HLG One Holdings, of which Mr Birch is the sole shareholder and guarantor over the loan, was given 31 days to remedy the situation or be in default.
When HLG One Holdings had not done so, Permanent Mortgages, who were charging a variable interest rate of 6.94 per cent plus late payment fees at an additional rate of interest of 5 per cent a year, sued HLG One Holdings and Mr Birch claiming repossession of the property together with $548,367 and interest accrued on the amount at a rate of 11.94 per cent a year from August.
Extraordinarily, Mr Birch did not file a notice to dispute the claim within the stipulated 28 days – an action which meant a judgement could be made against him for the amounts owing plus costs.
On October 24 Permanent Mortgages requested the court registrar give judgement against HLG One Holdings “in default of filing of a notice of intention to defend in response to this claim”.
This was granted on October 30. The notice reads: “The judgement of the court is that: 1) the first defendant (HLG) pay to the plaintiff (Permanent Mortgages) the amount of $548,594.68 including $15,106.69 interest to today and $2614.80 costs, 2) the plaintiff recover as against the first defendant possession of the land … situated at 9 Victor Avenue, Paradise Point, Qld 4216.”
Neither La Trobe Financial nor Dunstan Hardcastle responded to requests for comment.
Scramble to sell ‘up to 20′ properties’
At the time of his mortgage default Mr Birch appeared to be scrambling for money to resolve his cashflow problems (despite claiming an income of $500,000 a year), revealing on his blog on Binvested.com.au – the property investment company he runs with fellow investor Daniel Young – that he was selling some of his properties, up to 20 he later told news.com.au
But he denied at the time he was being forced to sell, writing that he could “sit on this portfolio and ride these finance changes out without breaking a sweat”.
“For years now I have been channelling equity into deposits for new properties, but it’s no secret that equity is very hard to release these days – even if you have millions of dollars of it,” he said.
In his emailed response to the Financial Review, Mr Birch, who drives a $200,000 Bentley bearing the personalised number plate CSHFLO, said 2017 had “more than anything highlighted just how important strong cashflow is”.
He said that as a result of “big legislation changes” he had had to adapt his investment strategy, which he summarised as “buying below market value, with a good upside for growth and a strong cashflow”.
“As a result of the tighter lending practices, I have simply sold some smaller properties and purchased larger ones to set myself up for a development phase in my portfolio,” he said.