Pros and Cons of Cross-Collateralization

tedstar1 wrote:

How would you set-up the loan for your 1st IP to avoid cross cat?

We owe nothing on our PPOR and were going to use the equity in it for a deposit and have the other 1/2 put in an offset account.

Split loan – one for deposit against PPOR
– One for the IP loan

With an offset account sitting in the middle helping reduce Interest repayments on both loans

Thoughts?

Never borrow to put in an offset account. This is very dangerous as it could ruin the deductibility of interest.

Use a LOC on the PPOR, borrow only to invest.
Set up an IO loan on the investment property and attach a offset account to this. All wages and rents into here.

Take the 23% from the LOC and borrow 80% on the IP = 103%

DeanCollins wrote:

<div class=”d4p-bbt-quote-title”>Terryw wrote:</div>
Take the 23% from the LOC and borrow 80% on the IP = 103%

….ok but you have now cross colateralised his loan…..isn’t this what everyone is saying not to do?

No crossing here.
LOC secured against PPOR
IO loan secured against IP

Can i have 2 offset accounts
1. for the PPOR where the deposit of IP will be along with the other portion of equity, so im reducing the P&I from repayments
2. The IP will have its own offset IO loan where rent goes into and expenses for IP only come out
?

Dont like the idea of LOC and what I’ve read with the bank “owning” the funds/properties

USING THE 240k in Equity against PPOR @ 80%
120k deposit for IP
120k in offset account to use for next IP purchase
This would be linked to PPOR LOAN

another offset account to put rent into, or can rent go directly on IP loan without needing another account?
If so setup will remain as above

Hope this clears it up?

THE funds in the offset account will be refinanced for 2nd IP and a 3rd IP loan setup to avoid x coll

Yes somewhat.

Borrowing 120k as deposit for IP and 120k that will be in an offset account linked to PPOR and to draw on if need be and use in 6-12months on 2nd IP. This is coming from using the equity in our PPOR that is paid off and has zero $ owing

Does this kind of make me pay more essentially for a 240k loan rather than 120k and should use a LOC?

Hmmm why would it be setup this way apart from reducing PPOR interest??

The offset will be linked to PPOR deposit/loan as this is not deductible anyway. The funds in the offset account will be used for next IP and a seperate loan will be created for the 2nd IP as this will still be included as the PPOR loan now being lets say 200k against PPOR loan