I watched the 2nd video and it was pretty good. Love your acting.
But you called the bank the borrower when they should be the lender (usually) and I am not sure what you meant by “I don’t want a non-recourse loan”.
Non-recourse loans generally only exist with superfunds and these are loans where the lender’s only recourse if to the security property and not to other assets of the borrower. You can’t get them with residential loans, other than for super, but if you could you would surely want one!
Ok, I have watched the first video now and you mention move about non-recourse loans. Even where you have loans with separate banks if you default on one loan they can take the property secured by the mortgage and then if there was a shortfall they can then come after the second property, or other assets, even though they are not mortgaged. They will simply get a judgment at the supreme court to allow this to happen.
I’ve had a read through this thread, and some of the others linked, and while I understand some of the potential pitfalls, I’m surprised there’s such strong, broad consensus against cross-collateralisation. Not that I’m here to argue, just curious. My background is in banking, but a relatively small customer owned FI, as opposed to a bigger FI. And I’m somewhat green in terms of serious investing, however have done a couple of major renovation/flips, and bought a couple of residential investments over the past few years.
I guess the main advantage I’ve been able to extract in my own situations previously by cross-collateralising is simplicity, and maximising the interest deduction. My approach has been to keep individual loans and offset accounts for each property in order to keep track of incomings and outgoings for each property. With significant equity in my PPOR, I have used this as additional security to allow a single loan to cover purchase price + all costs (including renovation budget in the case of the flips).
PPOR + IP A securing Inv Loan A (Offset A attached)
PPOR + IP B securing Inv Loan B (Offset B)
PPOR + IP C securing Inv Loan C (offset C)
I know it’s been said the same can be achieved without cross-collaterilisation, but would seem more complicated, harder to track what funds relate to what investment, and as Terryw has alluded to in the previous couple of comments, ultimately, if the bank wants to pursue your other assets, they will – even if a mortgage is held by another FI (i.e. there isn’t significantly better insulation of assets by doing so).
Curious to hear thoughts on this – particularly the structure I’ve used previously, as I’m looking to purchase another IP shortly, and there is definite benefit to me in retaining all my lending with the FI I work for (pricing is competitive, features – including unlimited free offset ac – are good, and ultimately it gives me a sense of control – I’m a semi-senior member of a fairly small team that manages our lending business).
Yours in curiousity… :-)
This is like insurance in a way. You don’t need to insure your house until you smell smoke, but by then it is too late.
I can think of real life examples x 3
Peter had 2 properties and the LVRs were relatively high. He had a heart attack and his wife left him and lost his job (not necessarily in that order). He needed to sell one property to unlock some cash to live on, but the other property had dropped in value. I think he did sell the first one, but couldn’t settle as the lender said the value of the second one had dropped and he needed more than the proceeds of the sale to reduce the LVR to 80% so they refused to release the mortgage and he couldn’t settle. He went bankrupt after that
Another was a guy who rang me because he had 10 properties and decided to retire and live on the capital gains by selling one every 5 years or so. The trouble was he had already quit his job when he sold the first property and they took the proceeds to pay down the remaining loans so he had nothing to live on. i suggested he go and get a job and then refinance and uncross, but he didn’t like the idea of coming out of retirement.
And the last was similar. An elderly lady had 3 properties mostly paid off and therefore unable to get the pension. She needed to sell one for some unexpected costs and to supplement living expenses as the rents where not enough. But her bank said they would only release the mortgages if all the proceeds was used to reduce the remaining loans on the 2 properties left. so she needed to sell a second property. In the end I think she would have had one paid off property and a bit of cash.
All could have been avoided, but for their crossing of securities.
I can understand how each of those 3 scenarios could come about, and have seen them happen, but in my experience are far and away the exception rather than the rule (I spent a few years as the bank’s senior discharge officer). But I take it on board.
In terms of alternate (“non crossed”) structure in my example above, I’m assuming a separate facility secured by the PPOR to cover the 20% deposit + costs for all subsequent investments is, in basic terms, how things are generally structured, with individual, non-crossed loans for the remaining 80%? I.e. the below, as opposed to what I’d laid out above:
PPOR securing OO Debt (if any)
PPOR securing Inv Loan Z for Deposits & Costs for any Inv purchases requiring the equity release
IP A securing Inv Loan A (covering the balance – i.e. 80% – of IP A)
IP B securing Inv Loan B (covering the balance of IP B)…. and so on?
And assuming the second loan noted there – Inv Loan Z – secured by the PPOR, but used only for the investment purposes, will be deductible come tax time (I must admit, I was thinking completely separate loans for each property, but as long as that Inv loan is kept clean of any non-deductible drawings, then the whole interest amount should be deductible in theory, and wouldn’t need to be broken down property-by-property in tax returns?)
I guess ultimately, I need to weigh up for myself the benefits and drawbacks of each approach for my current and future position/goals, so just trying to understand other perspectives and the logic behind them!
Yes thats how you could structure to avoid crossing. I also generally recommend that as the values of the IPs rise the 20% deposit loan be moved over to be secured by the investment property it relates to. But this might mean unmixing the loan first (2nd one in your example) if it had been used for 2 or more properties.
Got ya. Thanks Terry, appreciate your insights. And probably due to look at doing exactly what you’ve suggested there – the most recent property purchased in Dec 2019 is in a market that’s gone nuts, and should well and truly stand alone now. I wish I could say that I saw it coming, but far more due to dumb luck than anything (I was confident I got it under valued, with good rental yield, potential to subdivide/improve and would tick along with flat to OK capital growth at worst… but it’s probably added ~75% in value in less than 18 months!!!)