I am having a wee bit of trouble with the spelling at the mo..
Anyway my question is:
There seems to be a bit of a trend in some books I’ve read to say “Don’t cross collateralise” [thumbsdownanim – keep the mortgages seperate, esp your own house. This means the banks won’t foreclose etc etc.
My broker is distinctly against this – he has a valid point that if you had say 3 mortgages with a bit of equity in each, to get a new loan you’d have to steal bits from each to use as equity for the next, and your associated costs would go up.
He also says it’s pretty old fashioned? [square]I agree with him, but am curious as to why the books I am reading lean towards the “avoid cross collateralisation”
My thoughts is that you could only do this if you could afford cash deposits of 20% or your Individual IP’s could afford to pull a chunk of equity drawdown to use as input to the next deal.
Who does what? Is there anyone here who has cross collateralised loans and is happy with that approach?
This (CC) is my current setup and I would like to
review it before finance date on my next purchase.I am reading another book at the moment that says entirely the opposite “banks won’t foreclose, they aren’t in the business of selling / keeping real estate” They would rather help you with re-finance etc etc.
Any ideas from people??
PS – Isn’t it bizarre that you can read two books – both with OPPOSITE information – ie Neg gearing/pos cashflow
(Peter Spann vs Steve McKnight, Jan Somers vs Hans Jakobi etc..)
[confused2]I agree with your broker where there is only small equity accross three mortgages.
However where a person has larger equity in one mortgage they wish to use I always ask the bank to not xcoll. It just makes things easier for when the client has a lot of properties and then wants to start selling them seperately. Always start as you mean to go on.
But at the end of the day this issue is not a ship stopper as my Naval friends would say.
Cheers,
Simon Macks
Mortgage Broker
http://www.mortgagehunter.com.au
0425 228 985NODOC Loan – 65% Loan – No questions asked! 6.85% Rate!!
Comments may not be relevant to individual circumstances. If you intend making any investment, financial or taxation decision you should consult a professional adviser.
So neither of the two tactics are really better than the other – it just depends on where you are starting from?
IE – we started with not too much equity in our PPOR (about 60K equity on a 180K house)
we cross collaterliased for IP 1.Then IP 2 – we went to purchase even though we had about 80K Equity in PPOR and 20K in IP1.
Then, when we re-financed IP1 to interest only, the bank Cross coll. (sp?) back to IP2 as well!
So now they are all tangled up with each other.
Not too big a deal I guess.
I would suggest having each mortgage separate in a perfect world. However, consider the cost/benefit. I would not suggest this structure if it’s going to cost a lot to set up. There are some professional packages that allow you to set up unlimited new mortgages at no cost. These allow you to design a perfect structure at no cost.
Perhaps read an article on loan structuring – http://www.prosolution.com.au/articles/structure.pdf
Cheers
Stu
I agree that it is generally best to avoid, but if you do have to cross, then you can uncross after some growth without too much fuss.
Also, banks will and do foreclose! They aren’t in the business of selling real estate, but they will do this if you stop paying. It will be up to you to find an alternative lender who could refinance you.
Terryw
Discover Home Loans
North Sydney
[email protected]Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
True that banks do and will foreclose. It’s up to me to be proactive. If I get into trouble through being silly or over-stretching then I need to do something about it.
However – the counter argument is that banks will rather keep you as a paying customer and may give you a loan repayment holiday or other to avoid the cost & hassle of selling the thing?
I am currently considering the following:
Professional package. ($300 P/year) Which bank?
allows a single LOC facility for all IP’s and you can apportion the interest to different borrowers (ie my wife and myself).
I can add and remove new IP’s into the mix at will.Also – Allows a sigle facility against my home which will enable me to have a simple P&I against my home (similar to what I have now) at a very good intro rate, and good ongoing too. better than I have previously been quoted.
(nice idea stuart BTW to put the money in an offset instead of paying off your own home, I don’t know if I could trust myself not to spend it though! !!)
I will consider all your replies but the message i am getting is
A) Cross securitisation is easier to spell.
It’s a technique used by banks who love security, and also to increase customer retention
C) it can be “Fixed” by having cash deposits or by re-financing the whole lump of properties at once, but this can potentially be a hassle.Big A,
my understanding of Xcoll is that it gives the banks MORE security. As we all know banks don’t like taking unnecessary risks, kinda like us! So for them to sell you out, the mud has to really fly as it is a last resort to protect them from loss. It gives all sorts of BAD publicity and that’ll cost them money – so they don’t like to forclose! Most of the time, if you don’t satisfy their “safety” requirements they just turn you down.
I have not considered the difference in costs, BUT have heard a lot of negatives about the ‘accesability’ of your equity thru Xcoll.
That is once Xcoll is in place, you have a more difficult time re-drawing (again this may have changed since I last looked into Xcoll). Basically it reduces your freedom!example: You have 3 properties (PPOR + 2 Ips), Xcoll. You do a valuation and if one of the houses has lost value (for whatever reason) they wont let you re-mortgage to buy a third IP (this just happened to a friend of mine).
So you can’t buy and so are stuck until this situation changes! Even if this doesn’t happen, you need to redo the whole lot (as in refinance everything) to buy another IP
If the loans are all individual for each house, then you could secure the one that has lost in value (simply re-draw from one of the other two/ or don’t tell the bank – depends on you) – problem solved, and, if enough equity is still available, you can buy that third IP. If none of the houses have lost any value then it is even easier to purchase another IP by drawing on the equity of any of the individual properties.In short. Xcoll is more restrictive!
Cheers
C@34
Calvin@34.
I agree in that case Xcoll could be more restrictive. It does give the banks more security. It also is a tool to avoid taking out cash and putting 20% deposit, if it doesn’t suit your circumstance.I think it’s the only thing that got me this far though. I only saved cash for 1 deposit – in my PPOR. I ‘used equity’ in a cross collateralisation technique spelled it right first time!, rather than withdraw cash and deposit on the IP’s.
The investment properties are at the stage now when my own house could be removed from the XColl mix, which would suit me nicely but make no difference as to the banks power to repossess if I go with a professional package at the same bank.
According to Stuart Weymiss’s site- the banks can only repossess your home quickly if the names in which the loan in are the same as your IP loans.
There’s pro’s with going with the same bank – might be able to broker a better deal, and pro’s to going with seperate banks for home and IP’s.
I guess it depends on your risk level.
My thoughts:
I could change the loan for the PPOR in my own name, set it up as interest only, put the P&I ‘repayments’ into an offset account, have the IP’s as interest only in my wife and my name, then when we move again, take out the offset account money to put into our new home as deposit, and rent out our old home as a renter.The bank would have “chinese walls” against my own home because
A) it is not Xcollaterlised with the two IP’s on setup, and may not need to be.
it is ONLY in my name.
C) the IP’s loan is in both names (with apportioned interest to whoever ‘owns’ the IP, my wife or myself. <C was my broker’s idea>Creative. Saves non-deductible interest.
Allows a ‘way around’ the age old problem of ‘renting out your own home’ with minimal
Sounds good to me!Issues are:
If I want to buy another property and don’t have enough equity in
A) my own home
both IP’s combinedthen I will have to XColl again?
I think I will be releasing my own home from the mix to free it up for a while. Until the next purchase, but we might have enough equity in the two IP’s combined to avoid putting our own home in the mash.
Woah. I think I just busted a blood vessel.. [wacko]
Cross colaterisation across a portfolio of 1 or 2 properties may seem to pose no apparent problems to an investor in the early stages of wealth creation,
In a lot of cases as long as the banks continue to approve requests for further funding the investor is content and usually oblivious to what lies ahead.Usually the problems of cross colaterisation only become apparent to the investor when a request for further finance is declined, the remedy is often a costly refinance of the portfolio to an accommodating lender,
In most cases this could have been avoided with the correct loan structure and a little forward planning,
There will always be certain situations where cross collateriastaion is unavoidable, but this should only be seen as a short term solution, Start with the end in mind.Regards
Steven
Mortgage Broker[email protected]
http://www.mobilemortgagemarket.com.au
Ph:0402483216
Ph:1800 820 500
VICTORIAPLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.
Cross colaterisation across a portfolio of 1 or 2 properties may seem to pose no apparent problems to an investor in the early stages of wealth creation,
In a lot of cases as long as the banks continue to approve requests for further funding the investor is content and usually oblivious to what lies ahead.Usually the problems of cross colaterisation only become apparent to the investor when a request for further finance is declined, the remedy is often a costly refinance of the portfolio to an accommodating lender
Thank you Steve, this is what I wanted to say. I hope I did?!?
The bank would have “chinese walls” against my own home because
A) it is not Xcollaterlised with the two IP’s on setup, and may not need to be.
it is ONLY in my name.
C) the IP’s loan is in both names (with apportioned interest to whoever ‘owns’ the IP, my wife or myself. <C was my broker’s idea>I don’t know if this works. I thought that when signing a mortgage, you sign a personal guarantee that you are liable for any financial losses to the bank. That is, whether the PPOR is in your name only or not makes no difference if your IPS need to be forclosed, they’ll still come and grab your PPOR! It’s in your name and you signed a guarantee and therefore they (the Bank) is entitled to take it to minimise their losses.
Please correct me if I’m wrong.[blush2]
Cheers
C@34
It’s a technique used by banks who love security, and also to increase customer retention
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