All Topics / General Property / CROSS COLLATERALISATION???

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  • Profile photo of benno1benno1
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    @benno1
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    Hi all
    Im wondering if the chosen strategy is “Buy and Hold” why it is not a good idea to Cross collateralise. My understanding is that it is using a number of ip’s as security againts future ones. Would it be OK as long as you had enough equity to resecuritise at the time of sale?????

    Profile photo of geogeo
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    @geo
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    soory – but im confused [confused2] about your post[ohno]

    “If You never never ask, you’ll never never know”

    Profile photo of RugbyfanRugbyfan
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    There are two states (very greedy) that I know of that look at cross colateralisataion (sp.?) as a way to get more money from you in stamp duty on the mortgage.

    I will try to explain it the best I can:

    QLD – if you buy a property using any other property as security (cross colat.) you have to pay the stamp duty (mortgage) on not just the loan for the property but also the loan facility on any other property that has been used for security. ie. We bought an IP and had to pay and extra $1500 in Mortgage Stamp duty as it was secured against our PPoR which had a loan facility of $300,000. We did not have that much outstanding on our PPoR as we have been paying it off very quickly, but as the loan facility was for that amount (in other words we could borrow that amount against our PPoR) we had to pay it.

    WA also charge extra but you are only disadvantaged if you buy multiple properties in WA and the properties in other states are not worth huge amounts in comparison. It is a very lengthy discourse I know, but I hope it helps.

    For info on QLD look at this link:

    http://www.osr.qld.gov.au/taxes/duties/mortgage_multijurisdictional_faq.htm
    (Look at the second FAQ)

    For info on the WA tax look at this link

    http://www.dtf.wa.gov.au/cms/osr_content.asp?id=268

    or ring your mortgage broker.

    ‘Eat rich food, barbeque a yuppie’ [greedy]

    Profile photo of RubbachookRubbachook
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    It’s been a while since I read the book, but I think Steve’s logic centres around flexibility to be able to dispose of properties when it is appropriate to do so.

    Profile photo of elveselves
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    @elves
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    if you cross collateralise eventually you will run out of or reach a lending limit.

    you might be ok with one or two, but if you keep them more as single entities you should have greater bargaining power, more flexibility to sell in the advent of something going wrong.

    if everythig is tied up with everything else, it gets very messy. And ultimately expensive

    Elves

    ” a blind man may see what a sighted man may not”

    Profile photo of TerrywTerryw
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    You are limited to one bank – which can be a pain in the arse when they won’t lend you any more!

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of MiniMogulMiniMogul
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    I agree with elves and terry! However, i have rather cheap properties and I have heard that the banks may want me to CC them.

    if that’s my only option then I will, but not if i can help it. however like you my chosen strategy is “Buy and Hold” .

    “why it is not a good idea to Cross collateralise.”

    If something happens, heaven forbid, the bank can take them both not just one, and also, no flexibility to dispose of one of them without tricky refinancing and maybe penalties.

    Profile photo of brentbrent
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    @brent
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    Yep – flexibility is a big factor. But what about protecting your empire?

    If you were a banker, would you want your clients to cross-collateralise / cross-securitise?

    Sure you would!

    Cross collateralisation is awesome for the bank’s risk in the deal – if one property deal falls over, the bank has every other property which they can come after. (I always thought that’s what cross-collateralisation literally means – multiple properties being used as collateral on one-another.[eh])

    For your own asset protection point of view, is it something which you’re prepared to do?

    From what I’ve seen, most people have a choice whether or not to do it. I guess I’m just a little confused as to why people would choose to Cross-Coll. to begin with..[confused2]

    Brent Hodgson
    PropertyInvesting.com
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    Profile photo of JetDollarsJetDollars
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    @jetdollars
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    I Cross-Coll most of my IPs, but maximum is 3. But every now and then when the property have enough equity to stand alone, I just inform my lender to do the revaluation of the property for itself to stand alone.

    I am sure by set up LOC or the so called Master Account from you existing equity you can go to any bank to borrow money without just stick to one bank.

    Kind regards

    Chan Dollars
    [Retire Young, Retire Rich] [strum]

    Profile photo of Still in SchoolStill in School
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    Hi Chan,

    i think evening doing a Master Account from your existing equity and setting up a LOC structure, will still be cross-collaterialised, you would still need to set up each property with its own LOC account…

    …though i could be wrong with this…

    Cheers,
    sis

    People 4get that by saving just $3 a day & investing it sensibly
    over a working life, you’ll end up with around $1 million

    Profile photo of Prop16Prop16
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    @prop16
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    Sis,

    as far as I know we could use the LOC for the 20% deposits of the various IPs we intend to buy (to avoid Mortgage Lending Insurance) and to pay a downpayment if we need to do a quick purchase.
    Let’s say we’ve got $100,000.- LOC and the IPs cost $100,000.- each.
    $20,000.- deposit for each IP. Then finding another loan for the balance of $80,000.- using the security of the IP.

    Correct me if I’m wrong.

    Prop16

    Profile photo of CastleDreamerCastleDreamer
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    Prop16, I do exactly the same thing. One LOC against a single stand alone property – draw deposits from this. Once this LOC is exhausted, will start a second LOC on another stand alone property and do same again.
    CD

    CastleDreamer

    Profile photo of AdministratorAdministrator
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    @piadmin
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    As noted by other replies, offering multiple properties as security for an overall loan limit, locks borrower into one lender.

    Selling properties under such a arrangement would entail the lender revaluing all proposed remaining securities (unless valuations had been done recently), to acertain the residual total value, and the total loan limit adjusted according to total residual value. This appears to be a fairly rigid negotiation senario with lender, and not wonderfully flexible and simple loan packaging lenders may claim.

    A LOC is really just like any other loan as far as securities apply, it may or may not have multiple securities to support the loan limit. Portfolio loans (LOC) employ multiple securities/collateralisation feature.

    A possibly better option is to establish a LOC for investment against one security such as PPOR. Then investor can draw funds from this LOC as cash deposits for purchase of IP’s that are independantly securitised with most suitable lender.

    A downside to this strategy, is until the LOC is fully drawn in purchasing income earning assets, the undrawn amount is reducing more significantly, your total loan servicability, ie; LOC is just another liability where lenders include repayments required to service the maximum drawings. To minimise the loan serviceability problem, you can incrementally increase you LOC limit before each proposed asset purchase.

    James

    Profile photo of TerrywTerryw
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    From memory, Stuart (of this forum) has a good article on loan structuring in one of the recent issues of the API magazine. In the article, he demonstrates why it is not a good idea to cross securitise.

    Terryw
    Discover Home Loans
    North Sydney
    [email protected]

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://www.Structuring.com.au
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au

    Profile photo of JetDollarsJetDollars
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    @jetdollars
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    The previous issue of API magazine explain fully of how to set up LOC / Master Account.

    Example:
    PPOR current value = $300k, current loan = $100k
    Maximum equity = $200k

    Available Equity = ($300k x 0.8) – $100k = $140k

    Set up Master Account = $100k

    Buy IP1 = $100k, loan = $80k and use $20k from master account

    Available in Master Account = $80k

    Buy IP2 = $200k, loan = $160k and use $40k from master account.

    Available in Master Account = $40k
    .
    .
    .

    Kind regards

    Chan Dollars
    [Retire Young, Retire Rich] [strum]

    Profile photo of CeliviaCelivia
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    @celivia
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    Originally posted by Chan$:

    The previous issue of API magazine explain fully of how to set up LOC / Master Account.

    Example:
    PPOR current value = $300k, current loan = $100k
    Maximum equity = $200k

    Available Equity = ($300k x 0.8) – $100k = $140k

    Set up Master Account = $100k

    Buy IP1 = $100k, loan = $80k and use $20k from master account

    Available in Master Account = $80k

    Buy IP2 = $200k, loan = $160k and use $40k from master account.

    Available in Master Account = $40k
    .
    .
    .

    Kind regards

    Chan Dollars
    [Retire Young, Retire Rich] [strum]

    CHan, this is the way we set it up, and have bought our 1st IP last year according to this plan.

    We have more equity available for deposits and costs for another few IPs, but still looking for the next suitable IP (CF+ or neutral at worst).
    I think it’s a good way because you can just keep topping up the LOC.

    ALso, it’s handy to have this available to buy property straight-out of the LOC, so you don’t need a financial clause in contract for sale and don’t have to wait for financial approval.
    THis may, hopefully, give us a good negotiating point.
    THen refinance the IP later and top up LOC again.
    Now all we have to do is find another IP![rolleyesanim]

    Profile photo of JetDollarsJetDollars
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    @jetdollars
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    Celivia,
    I think there is one catch tho…the interest on LOC will be higher comparing to the normal structure where you do cross-coll.

    Kind regards

    Chan Dollars
    [Retire Young, Retire Rich] [strum]

    Profile photo of RugbyfanRugbyfan
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    @rugbyfan
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    I agree Chan, you have to weigh up the options and see if the higher interest rate is really worth it.

    For me it wasn’t.

    ‘Eat rich food, barbeque a yuppie’ [greedy]

    Profile photo of CeliviaCelivia
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    @celivia
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    Post Count: 886

    True, but I don’t think the interest rate is that much higher. 6.6% I pay at the moment.
    But the idea is to keep topping it up, and refinance IP asap to add back into LOC.
    I’ll have a think about it though, thanks for your warning/opinions.

    Profile photo of Still in SchoolStill in School
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    @still-in-school
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    Post Count: 1,844

    Hi Guys,

    depending what type of investor you are, different forms of revolving credit loans will suit different individuals, some people will prefer:

    locs
    offset accounts
    large credit cards
    different entities to invest through
    cross collateralising
    use of equity
    margin lending
    and so on and on…

    but even then, depending what investor you are, or what type of investment you are looking at, the above will suit different investments and the strategy you plan to use…

    Cheers,
    sis

    People 4get that by saving just $3 a day & investing it sensibly
    over a working life, you’ll end up with around $1 million

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