Should I cross collateralise?

Ive always held the belief that cross collateralisation is a big nono
tho I can't articulate exactly why when the mortgage broker asked me

What I want to do
is that I have 4 properties in personal name
I want to extract extra equity from the 4 properties - approx 300k

The new loans/ loan will be in a trust in the name of the trustee
Now - should I take out 4 separate loans in the trust - against each property to 80%LVR
Or cross collateralise and put it into 1 loan - in the form of a LOC

1 LOC would minimise a lot of paper work for now
What are the disadvantages of cross collaterlisation in this situation

The mortgage broker couldnt see any big problems with it
even if I sold properties or wanted to go to another bank for loans
What do you guys think

Dee,

The reason most people cross collateralise is either because they simply know no better or due to lack of equity i.e. they may have 6 properties with say $120,000 of equity in total but the problem might be that these properties may only have small amounts of equity available in each. Seeing as banks have a minimum amount for LOC's (e.g. $25,000) then they may not be able to purchase without cross collateralizing.

If you have a large amount of equity in each property I would suggest that you take out 4 LOC's as it will be more flexible in the future.

Also I have been told that mortgage brokers do not get much commission for setting up LOC's maybe they are steering you towards cross collateralisation because they will earn a higher commission.

Cheers,
Pablo.

This has been debated to death, but here's a scenario where cross collateralising will cost you big time...

You've now got 3 properties, and over a few years you buy another 2 (total of five). You've got all of these under one loan and you've negotiated a good rate of 7.27%.

You want to buy another property. Do don't have cash for the deposit. At this point the bank says, 'We can't see that you'll be able to afford the additional borrowings. Our risk is getting a bit to high to lend more money.' and your loan gets rejected, despite that one of your properties has recently gone up 30%.

You could get a no-doc loan at 70% LVR, but first you need to release the equity for a 30% deposit plus costs. Unfortunately your existing bank again says they won't increase your current borrowings.

Time to refinance. The property that's experienced a lot of growth can be refinanced out, but then the bank insists on you using some of your new found cash to pay down some of the remaining loans with the first bank (I've seen them do this). You may not be able to release as much cash as you originally intended.

Now the scenario means that you have to refinance all of your properties to different lenders. You may have to use no docs for all of these, but that's okay as you have the equity to do it. Unfortunately you also need do pay mortgage insurance of 2% on your entire portfolio for the no doc loan, and the rate is for every property is now 7.7% or more.

It's also taken you 6 months to get this done.

If you didn't have them cross collateralised, you could have gone with the first scenario of refinancing only one property. The lender wouldn't be able to dictate to you what to do with the money from the refinance. Whilst you might have to pay a higher rate for the new loan(s), you wouldn't have to pay higher rates on the loans that aren't touched, and you wouldn't pay the LMI.

Cross-collateralisation makes things easier at first, but it can really hurt you as it significantly limits your options later.

I think cross coll makes it less flexible for you in the future. As PT Bear said, you won't be able to just refinance, say, one property to another bank as easily, because the properties are linked.

If I was really strapped for equity and the only way to get financing was with cross coll, I MAY consider it. Given the LVRs some lenders are willing to lend at, though, I would exhaust my list of mortgage brokers before doing it.
Alex

Pablo said:

The reason most people cross collateralise is either because they simply know no better or due to lack of equity

Click to expand...

As PT Bear said....re-hashing very old ground.


OK Pablo....so lack of equity and completely clueless covers "most people" apparently. What about the rest ??


IMO, any technique that increases your leverage, increases the # 1 reason for investing in property.


Without the advantage of X-coll, we wouldn't invest in property. Each to their own I suppose.

thanks all
I found it difficult to search for 'collateralise' until i searched xcoll
instead.
Some good summaries in the forum

hi dee
if you have 4 properties refinance 3
and use the loc to pay down town the 4th to 0
and then equity lend against the 4 property
and separate lend on the new property with a different lender.
this is not advice as you need to work out your own financial advice.
the equity if more powerful then cash as you can use the equity without having to pay for it.
cross colat is not that bad as long as you have a good exit procedure.

Grossreal
thats an interesting thought
Doesnt tax deductability get really messy if I sell property 4?
What if I sold property 4 ,
the LOC from ip1,2,3 would not be tax deductable?

hi dee
it doesn't if you design your structure to never sell.
you are not selling 4 you pay down the debt and then equity lend against it
and if you read my post I am not one for selling assets
I use the built up equity to leverage against.
tax is not a problem and using the equity is better as you are not incuring costs to leverage but your accountant can explain this to you if need be.
if the whole project was to produce income and was not for personal use then you would not have a problem but again you do need to have the structure in place.you are at number 4 or 5 and you need to get the structure right.

at the point you are now you need to be mirroring what you do best and if you are asking these questions then you need to check your structure for me and make sure its setup right.
this is not advice and I do say on all my post that mine is information only and these are only ideas for you to look at.
my .002

Hullo Dee
There are pros and cons to x.coll'ing.
You can always xcoll to begin with and then do a partial release in property #2 (per se) down the line if you are trying to keep costs down.

In a generic sense, there isnt a 'simple' answer and you should do what is right for you.... its a case by case sometimes.

Im in the process of redesigning my structure as per this post
http://www.somersoft.com/forums/showthread.php?t=34559

The primary goal is still asset protection

I might sell 1 property and buy it back in the trust
incurring some stamp duty
but at least that property will be out of my personal name
I can avoid cgt - with the 6 yr rule on that property

Hiya

I would simply borrow in personal names and buy assets in the trust............

Gear the stuff outside of the trust to 95 % or more, thus increasing the assset protection, and top up regularly

In that instance Xcoll will not benefit but hinder you, because LMI looks at your deals as a single "security :"



ta
rolf

Rolf
Can you explain this concept of gearing providing more asset protection?
I always get confused about this

Say 1million asset valuation
500k loan
LVR50%
can extract 300k
lend to trust
trust buys asset - IP for 300k, or uses 300k for deposits for several prop

Ok personal name now geared to 80%
assets in personal name - still 1million - plus 300k asset -
liabilities = 500k + 300k
Net worth is still 500k

How does the gearing provide more asset protection

If i borrow in personal name
lend to trust and buy IP in trust
if sued personally - that money lent to trust can be clawed back??

whereas if i borrowed in the trust - using the properties in the personal name as security, - would I not have some protection here if personally got sued

Hiya

On the legal side, im getting out of my depth here, often legal process (rather than justice) doesnt work the same way as logic...........


If you lend the money personally from a lender and onlend to the trust, or you allow your personal assets to be used by the trust, as a guarantee and the trust borrows the money, I would have thought the derived benefit will be the same.............

Taking that logic one step further, could the trust have a second mortgage behind the bank to 100 % lvr .......................

Borrowing to 95 % of the assets from a lender out of the trust leaves less floating around outside of the trust.

Cross colling all ur properties to get to asset protection seems to at different purposes.............in any case ?

If your risk of asset loss is that siginificant, Id be looking really hard at selling up, or into the trust, take the tax hit and get on with a new clean structure..............

Often when playing at the margins to achieve something we want, we dont quite get there bevause we are trying to cut corners.

PS, I dont know what Im talking about here xcept the xcoll stuff

tarolf

I'm not as against x-coll as a lot ofn the other brokers on here, my view of of it is pretty simple. If you allow a bank to cross your loans you are giving them something to their advantage ie. greater control and security over your assets. Make sure you get something back in return.

I often come accross situation with commercial loans, particularly where there is development involved, where there is an advantage to cross residential security into the deal. The only real advantages if you are talking straight residential loans is ease of managing accounts, where crossing means there are fewer accounts, and making it easier to negotiate volume discounts. You have to weigh up what is most important to you.

Regards
Alistair

hi dee
when ever looking at these structures and as you have been looking for a structure to suit you they are very individual.
cross colat is used to gain and advantage as a perry has said I use cross to leverage in without using cash and there is very good reasons for it which for me are not for a board.
some things you keep in your on little bag
understanding cross colat is one thing but designing a structure around it is very different.
cross colat and leveraging are just screwdrivers in your tool box and just as you would not organise your tool box around a pack of screwdrivers the same with your structure.
a structure is not just for asset protection there is a lot more involved in organising it and buying ,selling down, leveraging or for that matter they way you buy property all has to be taken into account when deciding on a structure.
depending on the structure you have designed then even cross colat can be limited by the use of stand alone companies and crossing 2 does not effect the other companies in the group.
I don't tie up all companies to the one lender and separate as much as possible.
this is for information only

I just bought my first IP and I was advised by my MB to go for cross coll. When we saw the mortgage insurance it was heaps. What the bank had done was - it had adeed up all the loans and calculated the LMI on the full amount minus LMI already paid. My LMI was $7250 on an additional loan of 250,000. I asked the banker to split the loan as individual loans aginst my IP and LOC on the PPOR. The LMI was reduced to $3500. Though we got 235,000 only and had to pay $7400 from our pocket. But I think it was worth it. I just could not rationalise paying extra 3750 to get $15000.

Personal exp. avoid x-coll, if you can.

Cheers

G'day firstmillion,

That's a good lesson, right there. Thanks for posting....

I just could not rationalise paying extra 3750 to get $15000.

Click to expand...

That would have been a 25% impost as a "setup fee" - no wonder you didn't take it.
Regards,