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  • Profile photo of Roxy laceyRoxy lacey
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    @roxy-lacey
    Join Date: 2013
    Post Count: 10

    hi everyone, i am new to property investment, my husband and i have purchased 2 investment properties. our finance broker is suggesting we arrange one investment loan secured by the 2 properties, i am not sure about this, doesnt this fall under the term "cross collateralization" would i be better off arranging an independant loan for each property? Any advice will be welcome.thanks Roxy

    Profile photo of TheFinanceShopTheFinanceShop
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    @thefinanceshop
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    Yep classic case of cross securitisation and poor loan structuring. Good for the broker and the bank because it will give you less flexibility to move but terrible for you. 

    Did you go through longer term planning and discuss your plans with the IP and overall portfolio strategy?

    TheFinanceShop | Elite Property Finance
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    Profile photo of Jamie MooreJamie Moore
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    Roxy lacey wrote:
    hi everyone, i am new to property investment, my husband and i have purchased 2 investment properties. our finance broker is suggesting we arrange one investment loan secured by the 2 properties, i am not sure about this, doesnt this fall under the term "cross collateralization" would i be better off arranging an independant loan for each property? Any advice will be welcome.thanks Roxy

    Hiya Roxy

    Welcome aboard.

    Time to get a new broker – this one isn't up to speed with correct finance structuring and this could cost you big down the track.

    Cheers

    Jamei

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Roxy laceyRoxy lacey
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    @roxy-lacey
    Join Date: 2013
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    thanks Shahin, i had a feeling this was the case! as i havent actually gone ahead with the loans as yet (we are in the process of signing contracts) i will be sure i have 2 separate loans! the properties we have purchased are purely for holding and renting but no other discussions have been had! They are around 20+ years old, 1 a four bedroom house with a family currently renting and the second a 2 bedroom unit with a proposed tenant at settlement, neither need immediate work on them. as we are still paying of the ppor we will be obtaining an interest only loan (for each) and putting any extra into our ppor. we would like to see how it all goes with the intention of buying another ip in 2 years. thanks for your advice. roxy

    Profile photo of Roxy laceyRoxy lacey
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    thanks Jamie, i am now convinced i need to obtain a separate loan for each. i am so glad i asked the question and not just accepted what the broker has advised! roxy

    Profile photo of Roxy laceyRoxy lacey
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    thanks Jamie, i am now convinced i need to obtain a separate loan for each. i am so glad i asked the question and not just accepted what the broker has advised! roxy

    Profile photo of TheFinanceShopTheFinanceShop
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    Good work – create a "superman" account against the PPOR and pay IO. Divert all rental income to the PPOR Offset and then have all outgoings going from that offset.

    Disaster diverted.

    TheFinanceShop | Elite Property Finance
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    Profile photo of Jamie MooreJamie Moore
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    Roxy lacey wrote:
    thanks Jamie, i am now convinced i need to obtain a separate loan for each. i am so glad i asked the question and not just accepted what the broker has advised! roxy

    No worries Roxy. I think you'd be best off getting a second opinion on your current loan structure. You might be able to set it up better – which in turn will likely save you some money.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Mortgage Broker assisting clients Australia wide Email: [email protected]

    Profile photo of Colin RiceColin Rice
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    Well done Roxy for asking the question and no doubt will help others ask the very same question to their bank/broker. 

    Colin Rice | CDR Finance
    http://cdrfinance.com.au/
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    Perth Based Mortgage Broker - Investment Property Finance Specialist | E: [email protected]

    Profile photo of Dave WardDave Ward
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    Post Count: 37

    If the question is whether you should finance your investment properties stand alone or using cross collateralisation?

    Using the information you have supplied, in that you have a 20% deposit for each property, you should set up each property with one loan. That is, the security the bank takes will be on that property only. In the event that a default on the loan occurs and the bank calls in its security, you only have the property the loan is associated with at risk of being sold. In the situation where the property is cross collateralized (both properties secure the loan(s) given by the bank), the bank may choose which property(s) to liquidate in order to satisfy the outstanding debt. This is a much less beneficial situation for any investor. Not only that, under a cross collateralised loan position, if you decide to sell a property in your portfolio in the future to release some equity, the bank may decide to apply the equity to the remaining loan in order to reduce your overall LVR against the property(s).

    An example may be that you have 2 properties in your portfolio worth $900,000 with a debt against those properties of $600,000 or a 66% LVR. From first glance that would appear as though you have $150,000 equity in each property. However if the loans are cross collateralised and you sell one for $450,000, the situation then looks like this:

    Remaining Asset Value – $450,000

    Remaining Loan – $150,000

    LVR – 33%

    You would then have to apply to the bank for a line of credit against the remaining property in order to extract any equity from the portfolio. This is obviously very restrictive in what you are able to do with your money going forward.

    Having a 20% deposit for each property will also mean that you won’t need to pay Lenders Mortgage Insurance. That is also a beneficial cost reduction for the accumulation of your property portfolio.

    If you have any other questions, just ask and we will do our best to answer it in a non-complex, jargon free format.

    Take care.

    Dave Ward | First Step Property
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    Property Investor, Property Investment Expert & Advisor, Finance Expert & Strategist

    Profile photo of Richard TaylorRichard Taylor
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    Hi Roxy

    Yes i think you might have seen the light in time.

    Lovely little strategy for the lender and broker but not for you the client / investor.

    I am currently untangling the mess made by lenders / brokers for 3/4 other forum members and is always a matter of trying to get it right from day 1.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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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 Jamie MooreJamie Moore
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    Qlds007 wrote:

    I am currently untangling the mess made by lenders / brokers for 3/4 other forum members and is always a matter of trying to get it right from day 1.

    Story of my life. At least their incompetence keeps us nice and busy :-)

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of Richard TaylorRichard Taylor
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    Absolutely Jamie

    Where would we be if Bankers and Brokers gave clients accurate information !!!!!

    Cheers

    Yours in Finance 

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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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 Don NicolussiDon Nicolussi
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    Agreed it keeps us busy smiley – currently doing 7 property portfolio with 4 cross coll to a major with those 4 in 5 different security combinations with numerous facilities.  Pretty common. Just curious Roxy how did the broker position that structure to you. Was there a reason?

    Don Nicolussi | Mortgage Broker - Home Loan Warehouse
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    "I think of finance as a technology, a way of getting things done." Robert Shiller

    Profile photo of Richard TaylorRichard Taylor
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    Yes i think the worst one i have ever seen was 13 properties all cross collateralised to one of the majors.

    Clients were on the verge of retirement and wanted to sell their PPOR and use the net proceeds to buy into an over 55 home.

    Unfortunately when their existing Bank revalued the existing securities they refused to release any of the net cash proceeds on the PPOR.

    Took many months but we managed to get them all revalued and all on a standalone basis.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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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 jatejate
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    TheFinanceShop wrote:
    Good work – create a "superman" account against the PPOR and pay IO. Divert all rental income to the PPOR Offset and then have all outgoings going from that offset.

    Disaster diverted.

    Hi Shahin,

    Doesn't this method breach some taxation law in terms of items which can be tax deductible?

    That is, because this is mixing 'Personal' funds in your PPOR with 'Investment'?

    Regards

    Profile photo of Richard TaylorRichard Taylor
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    Hi Jate

    No not at all if done correctly.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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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 jatejate
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    @jate
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    Hi Richard, can you please elaborate how I can do this correctly to be tax compliant?

    Profile photo of Jamie MooreJamie Moore
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    Hi Jate

    As long as your run the funds through an offset account (and not a redraw facility) then you should be able to avoid any taxation implications.

    I'm not an accountant though – so seek expert advice on your particular situation.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
    http://www.passgo.com.au
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    Profile photo of TerrywTerryw
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    jate wrote:
    TheFinanceShop wrote:
    Good work – create a "superman" account against the PPOR and pay IO. Divert all rental income to the PPOR Offset and then have all outgoings going from that offset.

    Disaster diverted.

    Hi Shahin,

    Doesn't this method breach some taxation law in terms of items which can be tax deductible?

    That is, because this is mixing 'Personal' funds in your PPOR with 'Investment'?

    Regards

    Even better, borrow to pay IP expenses and save more in the offset

    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/

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