I am somewhat concerned with some refinancing my brother is currently undertaking, hence am asking for some of your expertise so can can stop him if he's about to make a mistake! I'm a novice myself, but it just doesn't seem right???
He currently has 3 investment properties. Property 1 has a single loan attached to it. Property 2 was financed with two loans, the first secured to property 1 and the second loan secured to the actual property. Property 3 is similar in structure and cross colateralised to property 2.
He is refinancing all 3 properties with UBank. The issue I have is that he's combining the separate loans to one mortgage against each property to have each at under 80%LVR. Therefore the two loans used to fund property two (one or which was secured to property 1) will now be one loan secured to property 2 only. Same will apply for property 3. If I've adequately explained it, he's basically mixing debts, thus will not be able to differentiate what loan is for what property. He's not worried and simply says his accountant can sort it out, but I don't think it's this easy, even though all loans will be IO.
Can someone please help educate me, so I can help him.
Thanks heaps in advance for your time.
Did he pay LMI on any of the existing properties? If so then he is losing the LI credit he has up his sleeve. UBank is a good non frills lender but terrible cash out policy and security/development policy so it all depends on what he plans to do with the each of the properties.
A lot of people underestimate cashout (in order to fund for further purchases) so you want to tackle this sooner than later.
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He is doing something that could cause him problems in the future.
2 main issues are tax and asset protection – if he gets into financial difficulty it may be more difficulty for him to control the situation.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Thanks for the response. Just to clarify, are you saying that if he was to increase borrowings again with his current lender, and he's paid LMI previously, that he wouldn't effectively have to pay it again? I assume this wouldn't be for new loans or properties, just the existing ones where he has previously paid LMI?
Thanks Terryw, would you be happy to expand further on some of the key issues regarding tax and asset protection. At the moment all the properties are in his name only, so I wouldn't have thought he'd be afforded any real asset protection now with the current structure anyway.
Not sure if I read you post right, but if he is combining loans then it may be difficult to apportion interest, especially if extra repayments are made and/or one is sold.
And, if he gets into financial trouble and goes to sell one property to release some cash to pay out his problems, then the bank could step in and take the proceeds forcing him into deeper trouble.
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Thanks Terry.
HI,
I would be a little concerned about the Cross – Collaterilisation and also the lenders All Money Policy. This is where the lender can call in all borrowings if the client has issues somewhere within the Portfolio. There will be also additional costs for the Accountant to work through the Interest Splits and Costs etc. through the Portfolio which could be potentially hundreds of dollars.
I would be thinking about lender diversification to make the Portfolio stand alone on each security, and I cannot stress that getting the right education and financial grounding early in a Portfolio is high on the list of things to consider.
Cheers Grant
Thanks Grant. I'll definitely be passing all of this on to him!
Just as an aside, I looked up your companies website and it would seem that you guys have a great offering
Hi Spongy
What's the major factor behind the refinance to ubank? The rates might be decent but for multiple property owners they are rarely a good option. Their cashout policies aren't too crash hot and their loans are restricted to quite low LVRs.
Did your brother pay LMI on any of these loans previously? If so, an external refinance means he's relinquishing the previous premiums he has taken out with his existing lenders – so if he needed to take these loans above 80% again at some point, he'd have to pay a whole new premium with the new lender (as opposed to a small increase on the existing premium with the existing lender).
He also needs to tread carefully with the structure and avoid crossing and contaminating debt.
There's also quite a few costs involved in external refinances – they need to be considered too.
Cheers
Jamie
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Thanks Spongy for your kind comments
Sounds like he is doing this refinance to UNCross-Collaterilise his loans.
You said that his loans are Originally
"He currently has 3 investment properties. Property 1 has a single loan attached to it. Property 2 was financed with two loans, the first secured to property 1 and the second loan secured to the actual property. Property 3 is similar in structure and cross colateralised to property 2."
That is Cross Callaterlising loan structure above
His refinance you said would lead to this
"Therefore the two loans used to fund property two (one or which was secured to property 1) will now be one loan secured to property 2 only."
That is Uncross Callaterlising his loans.
Pretty easy for his accountant to work that out. He now only has ONE loan per property.
Wilko, could be uncrossing a cross, but
Cross collateralising loans is when there are 2 securities for 1 loan. (ie the collateral/security is crossed, not the loan).
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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Thanks for your response Jamie – the sole reason he is refinancing is to get a better rate. I believe he will be saving about $5000 pa in interest (if I recall correctly). The costs to refinance each loan will be about $500-600, so justified based on the interest savings (ignoring all other factors and considerations mentioned). He has previously paid LMI, but I think he is now reassessing his future plans to continue to accumulate investment properties, as he has started a family with his wife and is considering selling up to purchase a PPOR. I really think I will now press him to see an expert BEFORE he proceeds with the refinance.
Thanks Wilko and Terry again. I'm certainly no expert as I said, so I'll be sure to get him to seek some expert advice with all of this 'restructuring'.
I'd be open to any suggestions for someone in Melbourne that he can see in this regard. He's based in Kingsville and works in St Kilda Road.
Thanks everyone again for your help! I just know I'm going to learn a lot on here
Wilko,
I think the OP has suggested the loans are not initially cross collaterised and that they are in fact standalone loans, but some of them have been used to pull equity out (deposit and costs) for other investments.
Cheers
Tom
Spongy
Refinancing to UBank and wanting to re-structure the loan so you can buy more properties is not a statement that goes hand in hand.
For a serious longer term investor saving a few dollars with a restrictive lending policy is certainly not a sound strategy.
Was down at St Kilda at the weekend and must admit spoilt for choice when it comes to restaurants and cafes.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Thank you all very much for your expertise. After discussions with my brother he has decided not to go ahead with the uBank refinance. I only have one investment property myself and unlikely to add to it as I'm now a stay at home mum so we're on one income, but I'm wishing I hasn't refinanced my loans! Oh well, maybe when I go back to work I'll refinance again and move forward.
Just one this point, are refinance expense deductible? From what I can see borrowing expenses are over 5 years, but can't find anything to say this also applies to refinancing.
Cheers
Refinancing costs should be deductible for an IP loan.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
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Spongy wrote:Thank you all very much for your expertise. After discussions with my brother he has decided not to go ahead with the uBank refinance. I only have one investment property myself and unlikely to add to it as I'm now a stay at home mum so we're on one income, but I'm wishing I hasn't refinanced my loans! Oh well, maybe when I go back to work I'll refinance again and move forward.Just one this point, are refinance expense deductible? From what I can see borrowing expenses are over 5 years, but can't find anything to say this also applies to refinancing.
Cheers
Refinancing involves taking a new loan so the same rules apply. Deductible over 5 years or the life of the loan if shorter. You can also claim the rest of the borrowing expenses on the first loan if less than 5 years has past – assuming both are investment related.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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