Hello investors!
I’m looking for some advice, it’s pretty easy, probably yes or no.
Let’s say I have property A with $50,000 usable equity and property B with $50,000 usable equity.
Can I buy property C using the combined $100,000 equity from property A and B?
I have it in my mind it’s usually only one property’s equity used for a new property but I’m not sure if that’s correct.
Thanks.
I’m not sure if it’s a similar thing, but I always use Property A for equity (PPOR) and as I have three properties linked, the bank then links all four together so any and all of the equity can be used across the four. My bank does a master limit which puts them all together and you can sell within this bandwidth. For example, two of my loans were fixed and one wasn’t. I could sell the properties within the fixed period as long as the loans weren’t over the variable’s value. As the variable loan was higher, it covered selling any one of them. Check this is correct before you go with my advice, that was my understanding from my broker.
Good luck :)Let’s say I have property A with $50,000 usable equity and property B with $50,000 usable equity.Can I buy property C using the combined $100,000 equity from property A and B?
Yep – that’s fine.
Just set up the $50k loans as separate loan splits for ease of accounting.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
I’m not sure if it’s a similar thing, but I always use Property A for equity (PPOR) and as I have three properties linked, the bank then links all four together so any and all of the equity can be used across the four. My bank does a master limit which puts them all together and you can sell within this bandwidth. For example, two of my loans were fixed and one wasn’t. I could sell the properties within the fixed period as long as the loans weren’t over the variable’s value. As the variable loan was higher, it covered selling any one of them. Check this is correct before you go with my advice, that was my understanding from my broker.Good luck :)
This is what they call cross collateralising securities – using more than 1 security for 1 loan. Very dangerous and should be avoided.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Hi Lisabellan,
Your scenario is indeed called cross collateralisation, which according to Investopedia:
Cross collateralization is the act of using an asset that is currently being used as collateral for a loan is also used as collateral for a second loan. If the debtor was unable make either loan’s scheduled repayments in time, the affected lender(s) can eventually force the liquidation of the asset and use the proceeds for repayment.
It can be dangerous because there is a clause in there that says the bank can force you to sell all properties even though there is only 1 ‘troubled’ property. But does not mean it is a bad strategy, so long as you understand the market, the fine prints and manage your risks accordingly. Remember, Luck favours the brave and risks commensurate with high rewards / losses.
Having said that, please let me explain further. Cross collateralisation is usually taken when the market is bullish ie. there is high chance of property price increases. If it comes down or if there is any other trouble that the bank thinks can only be solved through reducing exposure, they will ask you to reduce your mortgage balance (pay up a lump sum). If you can’t and you are cross collateralized, the bank has the right to liquidate all 3 properties A B and C.
It does not even have to be a real trouble, it could be perceived trouble. For example, all banks revalue their collateral all the time. If they foresee economic turbulence that necessitates reduction in property exposure, they will ask for a lump sum or liquidating the potentially troubled property. So the trouble does not happen yet… it is just what the banks see in the future. Your properties can be positively geared, but if the bank thinks one of them will go bad very soon, they may execute that special clause in your cross collateralisation agreement. I admit that this scenario is rare but it did happen in the US and Ireland during the GFC.
May be best to check the fine prints first and get a lawyer (preferably not a mortgage broker) to explain it to you. Not trying to scare you, just hoping to explain the risks further. Cross collateralization is a powerful tool if you can get it, but please make sure you know how to use it.
Cheers,
Catts-
This reply was modified 7 years, 9 months ago by
Benny. Reason: Salutation corrected to address the right poster - Lisabellan
Cattleya
Here to learn the ropes of property investing & share knowledge, not trying to sell anything at all.
I’d like to explain further. I have other properties which stand alone with other banks. I didn’t have any funds to pay the deposits on the last three purchases and cross collaterisation was the only way to move ahead. Needs must. I’m aware of the risks and will refinance once the properties have increased enough to stand alone. If there was another way to get a loan without amy deposit or linking another property with equity I’d be very interested in hearing about it.
Lisa there are always ways to access deposits without cross collateralising the securities.
You merely do a standalone equity release and use these funds as deposit.
If the loan was mortgage insured the way you did it may have been a lot more expensive.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
If there was another way to get a loan without amy deposit or linking another property with equity I’d be very interested in hearing about it.
Hey Lisa
Just needed to release equity from each property. Set up a separate loan for each. If it can be done with cross coll – it can be done without it too.
Cheers
Jamie
Jamie Moore | Pass Go Home Loans Pty Ltd
http://www.passgo.com.au
Email Me | Phone MeMortgage Broker assisting clients Australia wide Email: [email protected]
Thanks for the replies, but I fear this has become quite confusing to everyone.
It’s not cross Coll because that’s not what I was asking for, what Jamie said makes a lot of sense. Thanks everyone.
Hi Storeybuilder,
Thanks for the replies, but I fear this has become quite confusing to everyone.
Part of the confusion arose because one poster had addressed you, when they should have addressed Lisabellan. I have corrected that now – hopefully, that will remove some of the confusion.
In YOUR case, SB, as several have said, you CAN have several loans to “make up” the amount required. Sometimes, one might need 3 or 4 loans – much depends on how much Equity each property has. Do keep in mind that there can be LOWER limits to mortgages too.
e.g. If one IP only has $10k Equity, I suspect you may have trouble getting access to it – but then, those other guys (Jamie, Terry, and Richard) can give you chapter and verse on all this. Check with them. This doesn’t seem to apply to you at the moment though – but perhaps one to “file and forget” for now?
Benny
Thanks Benny,
Yes all theoretical for now. Good to know. Thanks for the help everyone.
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This reply was modified 7 years, 9 months ago by
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