Forums / Getting Technical / Finance / Cross Collaterisation

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  • Profile photo of sam2011sam2011
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    @sam2011
    Join Date: 2010
    Post Count: 123

    Hi Guys,

    i am sure someone has already covered this somewhere sometime on the forums but i need a more up to date answer.

    i currently have 2 ips, one i have a loan for $315 and value was $345 and the other i owe $136 and value is $150 so total mortgage is $451k and value is $495k.

    I just spoke to the bank to see if they need to do another valuation for me to get another loan and she said you have enough equity through cross collaterisation to get a cap lmi loan up to $190k.  I am pretty keen in purchasing but dont know much about the term "cross collaterisation", are there any issues with doing this?  i know if i wait 6months and do another valuation the $345 will be valued at around the $400mark.

    should i wait or should i buy?  and what does cross collaterisation mean (in basic english)

    thanks

    Profile photo of ducksterduckster
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    @duckster
    Join Date: 2004
    Post Count: 1,674

    Cross collaterisation means that the security for the next loan comes from all your properties.
    ip1 value = $345,000 and ip2 value of $150,000 total value = 495,000
    ip1 loan of $315,000 and ip3 loan of $130,006 = total loan of $451,000

    new total loan $190k + total loans of 451 = $641,000
    new total value $495,000 + 190,000 = $685,000
    LVR = 641/685 = 93% LVR most likely LMI for next loan would be added to loan to push LVR up to 95%

    in plain English
     Cross collaterisation means that if you default on any of the three loans  you risk the bank selling all three houses to pay back the debt.

    A closer look
    ip1 = 315/345 = 91% LVR
    ip2 = 130/150 = 86% LVR
    Some of the more experienced mortgage brokers on this forum would suggest getting a line of credit on the existing loans
    However you may only be able to borrow on LOC to 80% LVR but both existing loans are over this amount.

    You will have to decide if you want the inflexibility and dangerous risk of cross colaterisation or if you want to wait to pay more off the loans and have the values increase on the existing properties.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,190

    There are plenty of issues. This should be avoided where possible.

    One major issue is that the lender has you over a barrell and, for eg, if you want to sell one property you may need to get all the remaining securities revalued again. That may be fine in a rising market, but imagine if values had dropped and you needed to sell a property to get out of trouble and the bank won't release it. This happened to one of my friends and he went bankrupt.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of js2js2
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    @js2
    Join Date: 2003
    Post Count: 758

    It seems every time you talk to a lender the question arises sometime during the discussion, "do you want to use a property as security". My answer to date has always been NO. I think they must be taught to do it. There very cheeky! I was asked again today.

    That does not mean that i would not cross collateralize for example if i new i was selling a reno property in 6 mths- 2 years  i might offer that security if it meant getting the deal across the line. I would know the security would be released once the reno property proceeds paid down the loan.

    For now if it means not getting a loan i say no because currently i am purchasing for income and slight growth and or added equity via improvements, over the longer term.

    Profile photo of sam2011sam2011
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    @sam2011
    Join Date: 2010
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    i dont think ive ever been on a forum where peoplegenuinly spend the time to help, thank you!

    questions….if i default on a loan at the moment wont the bank still have the right to retrieve that money even if it means selling one of my other properties?

    i am pretty confident about the increase in value in one of them over the next 6months so i think its a risk worth taking.

    Profile photo of TerrywTerryw
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    @terryw
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    What would happen is the bank would firstly reposses any property mortgaged and sell that. If that is not enough to cover the debt they will then take further action to cover the shortfall. If a bank gets a judgment against someone they can then start proceedings to seize other property, even items not mortgaged.

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of ducksterduckster
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    @duckster
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    Post Count: 1,674

    Usually savvy investors isolate each property by separate loans with different banks for each property and may also use a trust or company structure as a form of asset protection.

    Why
    Because if you had different loans with the same bank and default they can still seize your other properties to pay back what you owe them.

    Profile photo of Cartman123Cartman123
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    @cartman123
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    Post Count: 15
    duckster wrote:

    Why
    Because if you had different loans with the same bank and default they can still seize your other properties to pay back what you owe them.

    Hello all,  (New to the game) 
    Is this 100% confirmed ?  The loan contract you sign says what property secures what loan. So how can they go against that,  (in a default situation) , even if they are with the same bank…. ? 

    Confusing…

    Cheers,
    Cartman

    Profile photo of TerrywTerryw
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    @terryw
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    Sort of.

    The lender will take the security for the loan first. If that is not enough to satisfy the debt they will go after your other assets .

    Terryw | Structuring Lawyers / Loan Structuring Pty Ltd
    http://propertytaxbook.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of v8ghiav8ghia
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    @v8ghia
    Join Date: 2005
    Post Count: 871
    Cartman123 wrote:
    duckster wrote:

    Hello all,  (New to the game) 
    Is this 100% confirmed ?  The loan contract you sign says what property secures what loan. So how can they go against that,  (in a default situation) , even if they are with the same bank…. ? 

    Confusing…

    Cheers,
    Cartman

    Hi Cartman – and welcome to the forum. Now……They can (in extreme situations) and its called 'The All-Monies Clause'. Cheers 

    Profile photo of Cartman123Cartman123
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    @cartman123
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    v8ghia wrote:

    Hi Cartman – and welcome to the forum. Now……They can (in extreme situations) and its called 'The All-Monies Clause'. Cheers 

    Thanks, glad to be here…  Learnt more in a month here, then I have in the 32 years of  my life….

    Cheers,
    Cartman

    Profile photo of BankerBanker
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    @banker
    Join Date: 2010
    Post Count: 371

    The all monies clause does not only relate to money with that bank – it covers all assets regardless where they are. The concept that splitting lending protects you in the event of foreclosure is a bit of a myth. A few years ago nab tried to sell a directors home when his company was liquidated and had gone broke. Although the property was mortgaged as security for the loan, the court orderred in favor of the customer. The bank had to sell the borrowers assets before the guarantors (he provided directors guarantee and was 100% shareholder). The company had sufficent assets to clear the debt therefore the bank could not simply choose to liquidate the guarantor asset first because it was easier. In the event the bank did not recover funds from the borrower, they could then sell his house.

    In the event you have a loan and the bank is foreclosing, the bank will need to sell the security specific to that contract. In the event the property is not adequate or the bank sells and there is still a loss, the all monies clause allows the bank to seize other assets. If you still owe the bank money the courts will freeze other assets e.g. property even with other banks etc. Even a clients partners and families assets can be frozen if they have made a financial contribution to them eg. House in wifes name but you paid the depoist or make all the repayments.

    A lot of people sell the avoid cross collateralisation spin as asset protection however it’s a load of bollocks. If you owe a bank money – and you try to split and move assets thinking the courts and banks won’t be able to trace then. Your living in fairy land.

    Of couse, because most people are never foreclosed on. They beleive the are very smart splitting lending…

    Split banking has benefits – but most are flawed.

    Profile photo of Cartman123Cartman123
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    @cartman123
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    Banker:  What you've said contradicts what others are saying on this forum. However, what you're saying seems plausible and quite likely reality.

    This is the first time I have heard, the term Cross-C (being new)  and splitting lending was recommended to me by some very credible people / brokers, on this forum. So are they all living in fairyland ?

    Cheers,
    Cartman

    Profile photo of crustycrusty
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    @crusty
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    Must agree with banker . From what I understand  and am told by reliable sources banker is correct.  There are alot of myths that are perpetuated  by spuikers  and authors  that the  sheeple accept as Gosble  Who mindlessly follow and repeat  it until every-one thinks it is true. Alot of those myths are contiinuosly repeated on this forum.

    Profile photo of TerrywTerryw
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    @terryw
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    It doesn't matter if  someone's property is used as security or not, if there is money owed, and a court judgment, that person's property could be seized and sold to satisfy the debt.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of sam2011sam2011
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    @sam2011
    Join Date: 2010
    Post Count: 123

    so then it doesnt really matter if you cross collaterize?

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,190

    Of course it matters.

    Firstly keeping things separate will buy you time. You will also have the choice of which property to sell rather than the bank.

    And then there are all the other issues and reasons to avoid it. CC doesn't help you in any way – just hinders.

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

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of BankerBanker
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    @banker
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    Terry is right that there are downsides to cross collateralisation. There are benefits though – albiet most people here don’t agree with me.

    Forgeting about cc and focusing on the split banking issue. If you go to see a bank direct and they already have all of your banking e.g. All loans , accounts, credit cards etc – you dont need to provide anyhing. Regular salary credits prove your income and they have all your statements on their system. CBA don’t event need a new privacy statement if you signed their post 2007 version.

    I’ve worked as a broker and as a banker. My preference is to use one lender and be in a position to move quickly.

    If you are an aggressive investor would you rather be able to buy cheap from people in a stressed sale position e.g. Knock 10k of the price for a 7 day settlement. Or would you rather split all your banking so in the event you do go broke you can move your properties delaying the banks collecion process – I’d rather have the first option.

    The other issue is simplicity of financial structures – if you have three properties with three lenders, do you really want to have to negotiate with all of them and pay all the extra fees of three applications to get to your equity? Cross collateralizing means one application to get equity from all properties.

    There are benefits to avoiding CC but it comes back to the yin and yang theory. For every positive there will be a negative and vice versa. If you can see one and not the other you are only seeing half of the picture…

    Profile photo of heathersheathers
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    @heathers
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    Post Count: 26
    Banker wrote:
    Terry is right that there are downsides to cross collateralisation. There are benefits though – albiet most people here don’t agree with me.

    Forgeting about cc and focusing on the split banking issue.

    A bit contentious coming from a banker.

    I’ve heard the term “free and floating charge” , does that relate here? I’d appreciate if anyone can explain what this is!

    Cheers,
    Heather

    Profile photo of BankerBanker
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    @banker
    Join Date: 2010
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    Hi Heather,

    I think you're referring to a 'fixed and floating charge'.

    Examples of fixed assets are; real estate, cars, equipment, machinery etc

    Examples of floating assets are; cash at hand, stock, trade debtors etc (move up and down)

    A fixed and floating charge (also known as a mortgage debenture) can be registered against a company. It means all of that company’s assets (fixed or floating) form part of the banks security. A fixed charge on a specific asset has priority over a fixed and floating charge registered against the company.

    When a company goes in to liquidation; anyone with a FFC will have priority over all unsecured creditors. This is why when big companies go broke their banks get paid before small suppliers.

    Some banks register a FFC when they lend to a private company buying real estate. It means the security is the property plus any rent, cash or assets in the company accounts.

    Contentious Banker

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