Forums / Getting Technical / Finance / Cross Collateralizing

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  • Profile photo of RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    I have multiple investment proprieties’s which are cross collaterlized by the same lender. I would appreciate advice / feedback on this type of financing structure i.e benefits or disadvantages. Any advice would be greatly appreciated.

    Profile photo of TerrywTerryw
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    @terryw
    Join Date: 2001
    Post Count: 16,058

    https://www.propertyinvesting.com/topic/4991056-cross-collateralizing/#post-4991058

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    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,975

    How much time do you have.

    No seriously I can count the Advantedge’s on half a hand yet the disadvantedge’s run to several pages.

    I wrote an article on the subject some years back in API so be happy to email it to you.

    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 RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    Hi Richard,
    Thanks for your advice. I would like to organize a re-structure asap.

    Appreciate if you could mail me the article “Copy of API interview 0-40 in a decade”.

    Cheers

    Profile photo of BenBen
    Participant
    @albanga
    Join Date: 2014
    Post Count: 54

    Hey Richard,

    I know very little about cross collateralizing (Just spent 20 minutes reading) and can quite easily see the negatives associated with this structure. Actually i do not think i saw one article promoting it!

    Just on my situation though, I have a split loan with my brother for our PPOR through Bankwest. We have been approved to construct a dwelling at the rear and estimate we will require a further 350k from a lender for the subdivide/build.

    I am not sure if this is a silly question because it does not have to do with an IP but should i be looking to structure it so the build loan is separate from our current loans?

    As in should we just create a new single separate build loan that we both pay off together. Or should we look into having the loans split again into different new loans that we both pay off separately as we currently do for our home loan. OR would we just get the additional 350k loan split and then added to our existing loans? for example my current loan is 280k which would then go to 455k?

    Thanks in advance!

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,064

    Hi Ben

    If the second dwelling is going to be an IP then it would make sense to split the loan up so you identify tax deductible (IP loan) from non deductible (PPOR loan) debt.

    It usually helps splitting it into ownership percentages when it’s sibling/friends borrowings – it makes it easier for each party to keep tabs on their finances. Keep in mind you’ll both be responsible for the total debt though.

    Cheers

    Jamie

    Jamie Moore | Pass Go Home Loans Pty Ltd
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    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,975

    Hi Rajs

    Sure happy to email it thru.

    Would you like to give me your email address or probably safer to email me and I can reply. ( my address is as per below).

    Cheers

    Yours in Finance

    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 BenBen
    Participant
    @albanga
    Join Date: 2014
    Post Count: 54

    Thanks Jamie
    The plan is to sell the rear dwelling upon completion so it will not be used as an IP.
    Once settled I then plan on having the front property valued and will then purchase it from my brother at the valued price.

    Is there any special consideration I should make with this scenario? or as suggested just split the build loan into our current loans and then once the house sells, split the money and pay down our separate loans. Then I imagine my loan will be around 140k and I will then to again need to lend around 220k to purchase the property from my brother.

    Profile photo of CatalystCatalyst
    Participant
    @catalyst
    Join Date: 2008
    Post Count: 1,404

    Rajs- Are they ALL cross collaterized or do you mean they are all with the same lender? They are not the same thing.

    Are all properties listed on all loans as collateral?

    Profile photo of RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    Hi, They are all collaterialized and with the same bank.

    Yes. All properties are listed on the loan as collateral.

    Profile photo of Richard TaylorRichard Taylor
    Participant
    @qlds007
    Join Date: 2003
    Post Count: 11,975

    Mhhh Rajs not a good way to start moving forward.

    Cheers

    Yours in Finance

    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 RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    Totally agree. I wish I knew this when I was advised by my brokers and property advsiors that x coll is the best thing.

    Cheers

    Profile photo of PLCPLC
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    @plc
    Join Date: 2012
    Post Count: 400

    Totally agree. I wish I knew this when I was advised by my brokers and property advsiors that x coll is the best thing.

    Cheers

    The only meant it was the best thing for them as it only needed one application to submit, and not multiple. Basically they were lazy which is never a good thing for the client.

    Cheers

    Tom

    PLC | Phoenix Loan Consulting
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    Profile photo of RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    I am in search of a broker with good knowledge on how to set up IP finance structures in Brisbane

    Profile photo of Jamie MooreJamie Moore
    Participant
    @jamie-m
    Join Date: 2010
    Post Count: 5,064

    I am in search of a broker with good knowledge on how to set up IP finance structures in Brisbane

    You might struggle finding one on this forum – lol, just joking.

    Get in touch with Richard Taylor.

    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: info@passgo.com.au

    Profile photo of RajsRajs
    Participant
    @rajs
    Join Date: 2013
    Post Count: 13

    Great thanks.

    Profile photo of Finance BrokerFinance Broker
    Participant
    @kathlenee
    Join Date: 2014
    Post Count: 14

    Hi,

    I would like to point out a benefit of cross collateralising. If a set of properties are cross collateralised there are certainly cons if property values go down in value. But what if they go up?

    No SALE scenario:
    If a cross collateralised set of properties go up in value and especially if one of those properties are owner occupied or PPOR then this could possibly be released unencumbered having the other investment properties take on the PPOR debt.

    SALE scenario:
    SIMILAR values or values gone UP:A new property to be purchased be replaced in the cross collateralise to make up for the one sold, through portability of the loan.

    These options are certainly not viable if you intend to sell a PPOR or IP in the short term. Its more for a long term hold on the properties or if you were certain you could increase its value in the short term. You could upgrade, renovate or subdivide to increase value thus benefiting the cross collateralisation even more.

    I’ll give you an example of where I have advised to cross.
    A client has 2 properties, 1IP and 1PPOR and would like to buy another IP (construction with hopes to subdivide). They also plan to sell the PPOR in the short term and upgrade. Current structure is this:
    PPOR
    Loan 1 owner occupied debt
    Loan 2 Investment shares debt

    IP 1
    Loan 1 Interest only debt

    If the properties are not crossed their new setup in order to purchase the next IP will look like this:
    PPOR
    Loan 1
    Loan 2
    Loan 3 – equity release

    IP 1
    Loan 1
    Loan 2 – equity release

    IP 2
    Loan 1

    When it comes time to sell the PPOR they will most certainly have to pay out Loan 1, 2 & 3.

    If they cross collateralise they’re new structure will be this: (i’ve typed this out across but it doesn’t display that way)
    PPOR
    Loan 1
    Loan 2
    IP1
    Loan 1
    IP2
    Loan 1 (100%+stamp duty)

    When it comes time to sell the old PPOR and upgrade they will replace the old PPOR with the new one and may or may not have to payout any loans.

    Cross collateralising is certainly not for everyone. It really depends on what your plans are. If you are unsure of this it will always be best to remain uncrossed so your life is less complicated. The question certainly requires more in dept research as to what you plan to do in the future and bad advise can certainly cause you a lot of hassle. Its definitely not a cross or not yes or no straight forward answer. I should note these clients have plenty of equity in their PPOR already and the area they are in are active in terms of sales data. The PPOR has also been upgraded and valued at a good price. This is a very optimal scenario. I’m just trying to point out, dont lose out on the benefits if the structure can help you and not everyone who suggests cross collateralise is the enemy.

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