Forums / Getting Technical / Finance / X Collateralising

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  • Profile photo of BabaBaba
    Participant
    @baba
    Join Date: 2007
    Post Count: 8

    Any advice on cross collateralising – for new IP
    Dangers ?
    Baba John[blink]

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    OMG Where do i start.

    Let me take breath and come back to you.

    Just avoid at all costs where possible.

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of propertypowerpropertypower
    Member
    @propertypower
    Join Date: 2006
    Post Count: 312

    Do it at your peril.

    cheers,
    Sanjiv Gupta

    “There is no passion to be found playing small – in settling for a life that is less than the one you are capable of living.” – Nelson Mandela

    Profile photo of BabaBaba
    Participant
    @baba
    Join Date: 2007
    Post Count: 8

    Thanks Richard & Sanjiv for your replies.
    Can you point me in the right direction to find out more about these perils & why to avoid at all costs.
    Sorry for being naive but ….
    My Mortgage broker has actually recommended we do it ?
    X collateralise one IP against a new one.
    Now I’m wondering why ???
    I haven’t done it yet – so……
    But I now know I really should undrstand this more.
    Thanks – if you can help me learn more from somewhere.

    Baba John
    [blink]

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,110

    If you are going to buy just one property it may not matter much, but if you want to get a few more it will hinder you.

    Jsut think of what cross collateralising means. It is one loan secured by two properties. So what happens if you want to sell one property? You will have to apply to get it released. This means another valuation on the other one and time and money and paperwork.

    What would happen if the other one had dropped in value? They may not release the one you want to sell.

    ALl this could be avoided by increasing the loan on one and using this as deposit for the next.

    Terryw
    Discover Home Loans
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    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    Sorry for my negative response I was just so darn tired and frusterated when i hear a reply from a MB like” Lets X collaratilise 1 property with another” it is obvious they have no understand about loan structuring.

    Terry has given you an excellent response but i could go on for hours with reasons why you wouldnt if you are looking to build your portfolio.

    One scenario image you have 3 or4 IP’s all X ed and decide to buy something else. You PPOR mortgage has been repaid and you think with all of the equity in your house you should be able to afford another IP.

    You approach your MB who works out the figures and tells you that due to the servicing model your Bank uses you cannot support another loan. You know darn well you can and another lender approves your loan using their servicing.

    Problem comes is that you want to try and access the equity in your own home but because all the of the IP’s are secured against you need to try and now unravel the mess.

    This would involve 4/5 new valuations (preying like mad that the original lender still agreed to go to 80 / 90% LVR on that security) and then trying to ascertain the amount they required by way of a cash payment to release the security of your PPOR.

    Other than a very expensive exercise the time frame could be weeks or months to get an answer. Your MB will not be too keen on doing this for you as he receives absolutely nothing (although in saying this i do it for my clients). You then have to deal with the Banks security department who have one thing in mind and that is making sure there security is covered.

    Too much of a headache for me especially if you had any of the loans fixed and then of course the Deferred Establishment Fees if any would come into play.

    Avoid it like the plague if you are wanting to build a portfolio.

    If in doubt change MB’s

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of TimCTimC
    Member
    @timc
    Join Date: 2006
    Post Count: 26

    I have learnt the hard (well not really hard in the scheme of things but still very annoying!!) way about the pitfalls of xcollaterising.

    Basically when we first started this property investing game a few years back when i was young and naieve we used our PPOR as security to buy our first IP. Few years later we had moved out of our PPOR and after renting it out for a while we sold it. However on the day before settlement we received the distribution of funds form from the conveyancer and low and behold the bank had taken an extra $15k to ‘pay down’ the other IP loan that our PPOR was used as security for, so that the LVR was to their liking (Regardless of the fact the place was now worth much more and they were working out the amount they took on the original purchase price).

    Basically we didn’t lose any money out of it, but we were lucky that we made enough money out of the sale to cover all costs etc and leave a bit in our kitty for future plans. But as said previously in this thread, it was very disappointing to get the bums steer from our mortgage broker and to not have the potential outcomes explained to us.

    Hope my story made sense. Just don’t do it!!!!

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    Tim

    Good story and I am glad for you it had a happy ending.

    I hear this every day of the week from clients and regretfully it is not all plain sailing when it comes to X collaterilising.

    I hope you story get read by every investor thinking of taking the plunge.

    Cheers

    Richard Taylor
    Residential & Commercial Finance Broker.
    Licensed Financial Planner. Ph: 07 3720 1888
    [email protected]
    New Shared Equity scheme has arrived – Email us for details.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of mathewc73mathewc73
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    @mathewc73
    Join Date: 2005
    Post Count: 241

    Baba,
    Best way to avoid x collatoralising is to take another loan out on the other property (required as a 2nd security) and using this money to contribute to the purchase of your current property. In total your LVR will remain the same.

    Thats the simple view, Im sure the MBs on this site will correct or provide other approaches.

    Regards,

    Mathew
    http://www.arrttt.com
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    Profile photo of LizzyLizzy
    Member
    @lizzy
    Join Date: 2004
    Post Count: 230

    I think everybody is agreed DON’T CROSS!

    Just tell the MB you want a seperate loan to against property 1 (which has the equity) and take out the remainder on the rest. If he/she is any good they will work out the best LVR’s to do this at to lower the LMI.

    Which is YET ANOTHER reason not to cross, the mortgage insurance premiums are much lower, as loan premiums are tiered on total lender per deal, therefore if you have uncrossed, two deals under $300k say, you will pay a lot less then one total loan crossed over $300k.

    Ask the MB what the benefit of it to you is (and watch squirm?) – as far as I can tell it’s only a benefit to the bank.

    The only time I have used two securities for one mortgage where I didn’t have to was because I knew a partial release of mortgage woud be required…

    Profile photo of BabaBaba
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    @baba
    Join Date: 2007
    Post Count: 8

    Thanks heaps to everyone for your comments. I've now suggested to my MB that I don't understand why I need to cross collateralise – that I still find it confusing and am nervous about it. I'm now told I that I don't have to but check with my accountant.

    I asked for but still haven't received any advice on why X-collateralising is a good idea.
    Since I've now got an option I won't be Xing.
    Thanks everyone – probably saved me a future headache by the sound of it.
    Baba John
    Profile photo of holoholo
    Member
    @holo
    Join Date: 2005
    Post Count: 8

    sorry to drag up this old thread, however I just wanted to say this thread has been very useful in helping me understand why X Collaterising is so bad, especially as I am getting my head around some options at present.

    Perhaps another noob (like me) might also benefit.

    Cheers

    Profile photo of bennidobennido
    Participant
    @bennido
    Join Date: 2004
    Post Count: 195

    When I started out investing, my 1st 2 IP loans was CC'd with my PPOR. Thankfully, it hasn't caused me any problems and they are still CC'd. But as I haven't needed to sell any of them and they all now have a decent amount of equity, I haven't bothered to refinance them and split them up.

    Now all my new loans are created as standalone loans, with my deposit taken out (i.e. redrawn) from my other loans.

    Profile photo of mum2fivemum2five
    Member
    @mum2five
    Join Date: 2007
    Post Count: 69

    We made the same mistake, PPOR + 2 IP's all together, we just sold 1 and had to end up paying to have remaining 2 re-valued to cover the payout figure for partial discharge….was not happy! See I knew we got enough for the place to cover that particular house owing amount, but they took the others into account as well, otherwise it would have all gone to the loans and we would have ended up with no $$$ from the sale!
    Wish I had known beforehand, luckily I caught it in time to get valuations before settlement, but sure cut it fine!

    Profile photo of corhigcorhig
    Participant
    @corhig
    Join Date: 2007
    Post Count: 37

    Hi there,  this is my first post to this forum, so be gentle !!
    So is it OK to have a few IPs with the one lender, as long as they're separate loans?  Or does the lender just lump them all together?

    Profile photo of v8ghiav8ghia
    Member
    @v8ghia
    Join Date: 2005
    Post Count: 871

    Hey, welcome to the forum Corhig. Good question. In theory this is how it should have been done, and many lenders in fact do IF you have  taken the loans out as stand alone products over a period of time, and not been convinced to sign any extra 'paperwork'. .You will see under 'security' on the loan what is offered, and it should only show the one property if not cross secured. That said, many lenders do feel the need to either suggest, trick you, or simply neglect to mention that your properties will be or should be cross secured. Cba and St.Gorge come to mind, especially once you start with so called 'portfolio' and 'package products'. The thing is, that in many cases the 'bankers' do not envisage someone buying more than one or two properties, so don't apprecitate the need to structure the loans seperately, (which it is not such a big deal in that case if you are holding and don't plan on selling or expanding) in other cases it is a deliberate ploy in order to make it hard to leave.
    That's the short answer. All the best.

    Profile photo of corhigcorhig
    Participant
    @corhig
    Join Date: 2007
    Post Count: 37

    Thanks for that V8ghia.  As a newbie investor, I've definitely been 'tricked' by lenders before.  Next IP I'll definitely be on the ball regarding paperwork and securities. 

    Profile photo of MooseheadMoosehead
    Member
    @moosehead
    Join Date: 2006
    Post Count: 42

    I think it's very unprofessional the way banks don't really explain how they are planning to structure your loan.  It's almost as if they will cross by default and only savvy investors (ie people who been burnt before, or heard of other who have been) will realise.

    Recently I applied for a pre approval with my banker at the NAB.  They couldn't comprehend that I didn't wish my existing IP to be security for the next purchase.  Almost like I was talking a foreign language…

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,992

    Moosehead

    You must understand that several of the major lenders are rewarded on a variety of sales targets.

    Retention of loan business is just one of the target areas and therefore a cross collateralised loan helps them retain your business due to the complexity of having to untangle the mess.

    Most Bank jonies are after every dollar they can get so dont be too hard on them.

    In addition, most of them have no knowledge or experience in investor loan structuring so to them it is all just one big loan.

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of Stuart WemyssStuart Wemyss
    Member
    @stuart-wemyss
    Join Date: 2003
    Post Count: 598

    Can I shamelessly plug one of my articles in API on this very topic???

    See http://www.prosolution.com.au/articles/x-sec.pdf 

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