Cross Securitising

Theres one thing I still haven't been able to wrap my head around properly and thats X-collateralising loans.

Can somebody please put an end to this for me?

I've read a book called 'the smart borrowers handbook' and its good, but I still don't fully understand.

Lets say we pay a deposit for out first investment property.

We then purchase another a year later, we pull out a deposit from a line of credit and use that as the deposit on no/2

number 2 has a seperate loan through another lender.

One year later we draw down equity on number two, upping that loan balance, and pay the deposit on no/3, no/3 has its own loan

We then draw down on no/3 for a deposit on no/4, no/4 has its own loan, from my understanding this is not X-col, what if some of these loans were financed through the same lender? would that make a difference to the story?

Or is X-col when we use the same loan for all properties?

When we use the same loan for 3 properties?

PLEASE! help myself and others understand once and for all.

In your example, they are not X-Coll. If more than one title appears on the mortgage, then the titles in question are X-Coll.
If the loans are with the same bank, then there is the possibility that the institution could have an "all monies" clause, which would make a difference in that they could call in all your loans if you get into trouble with one or more of them.
Int he next issue of Your Investment Property magazine, there will be a terrific article about refinancing and cross collateralisation written by a a handsome and clever young fella . Keep an eye out for it!
X-Coll can be used to great effect. I have done so to push forward with my portfolio growth. It can be a double edged sword, though, so it has to be used judiciously.

Rob Williams said:

X-Coll can be used to great effect. I have done so to push forward with my portfolio growth.

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How does x-coll work to help things along? What benefits are there to use it?

Let's consider you have two properties, each with a loan against them. Here are the possibilities, from most to least control for the borrower:

Not cross-securitised, most flexible for borrower

Property 1 has loan 1 with lender 1. Loan 1 is secured by property 1 only.

Property 2 has loan 2 with lender 2. Loan 2 is secured by property 2 only.

Not cross-securitised, but loans with single lender and thus subject to "all monies"

Property 1 has loan 1 with lender 1. Loan 1 is secured by property 1 only.

Property 2 has loan 2 with lender 1. Loan 2 is secured by property 2 only.

Disadvantage: All lenders have an "all monies" clause, which means that if you default on loan 1, the lender can still seize property 2 to satisfy the debt. But it's still better than being cross-securitised because you can sell property 1 or property 2 whenever you like, and for however much you like, provided you can cover the loan against that property.

Cross-securitised

Property 1 has loan 1 with lender 1. Loan 1 is secured by property 1 AND property 2.

Property 2 has loan 2 with lender 1. Loan 2 is secured by property 1 AND property 2.

Theoretically, these loans could be with different lenders, but usually cross-securitisation is only done with the same lender, because second mortgages - when you don't have control over the first mortgage - isn't of much use as security, from the lender's perspective.

Disadvantage: Default on one property and you could easily lose both.

Portfolio lending - "extreme cross-securitisation"

Property 1 and 2 have a single, combined loan with lender 1. Loan is secured by property 1 and property 2.

Not much worse than above, but really gives the lender total control over future expansion or sales. If property 1 has loan 1 for, say, $400K, you at least have some argument to say that you should be allowed to sell property 1 if you'll pay off $400K of debt. But with a portfolio loan, the lender will re-value your entire portfolio before deciding whether you can sell, or borrow more, and in today's market, that could be very limiting. They may say that even though you only borrowed $400K to buy property 1, you have to reduce your debt by $500K before they'll release the asset for a sale.

The argument for cross-securitisation

Giving the lender more control over your portfolio decreases their perception of the risk of carrying your business, and thus may mean the lenders will be more aggressive in lending to you. They may go to higher LVRs for a large portfolio if they have control over all of it.

Trogdor said:

How does x-coll work to help things along? What benefits are there to use it?

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In my case, I had equity in one property (A) that I was able to partially utilise to purchase another property (B) with an 80% LVR. When I wanted to purchase yet another property (C), I was able to utilise the remaining equity in property (A) to get the loan over the line with an 80% LVR.
With property (C), all 3 properties were X-Coll on that mortgage.
At the time, this was the most efficient way of financing (B) and (C) as all loans were witht he same lender.
I have since refinanced (A) & (C) to another lender, once again X-Coll as I needed a specific end value on the total refi loan and X-Coll allowed me to not be reliant on a specific valuation for each property.
The whole story will be in the next issue of YIP mag

Rob Williams said:

In my case, I had equity in one property (A) that I was able to partially utilise to purchase another property (B) with an 80% LVR. When I wanted to purchase yet another property (C), I was able to utilise the remaining equity in property (A) to get the loan over the line with an 80% LVR.
With property (C), all 3 properties were X-Coll on that mortgage.
At the time, this was the most efficient way of financing (B) and (C) as all loans were witht he same lender.
I have since refinanced (A) & (C) to another lender, once again X-Coll as I needed a specific end value on the total refi loan and X-Coll allowed me to not be reliant on a specific valuation for each property.
The whole story will be in the next issue of YIP mag

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Sorry - what I dont understand is why you couldnt just set up new seperate "top up" loans under property A and B to a max of 80% LVR. Then use these as a deposit for property C, and borrow the remainder under a new loan secured by C (subject to a max 80% LVR lend)?

Trogdor said:

Sorry - what I dont understand is why you couldnt just set up new seperate "top up" loans under property A and B to a max of 80% LVR. Then use these as a deposit for property C, and borrow the remainder under a new loan secured by C (subject to a max 80% LVR lend)?

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What you describe was an option. However, in my case, it was easier and faster to do it the way I did. When you sign unconditional contracts and offer very short settlements, as I do, getting the job done in a tight timeframe is essential. Most of my deals have gone ahead, against higher $$ offers based on surety and speed, from the vendors point of view. They get what they want (a sure sale) and I get what I want (better price and equity from day 1). Win-Win.

ozperp said:

Not cross-securitised, most flexible for borrower

Property 1 has loan 1 with lender 1. Loan 1 is secured by property 1 only.

Property 2 has loan 2 with lender 2. Loan 2 is secured by property 2 only.

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Can the "all monies" clause still be applicable for loan 1 with lender 1 against loan 2 with lender 2?

vbplease said:

Can the "all monies" clause still be applicable for loan 1 with lender 1 against loan 2 with lender 2?

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No, that's why using different lenders is a risk minimisation strategy.

vbplease said:

Can the "all monies" clause still be applicable for loan 1 with lender 1 against loan 2 with lender 2?

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Well... if you default on loan 1, and the sale results in a shortfall (ie you still owe), then it's possible for the lender to go after any of your assets, including property 2, but highly unlikely. It's a lot more protracted and expensive a process than if they already have a mortgage over property 2, such that it's nearly always prohibitively expensive. Lender 1 would also need lender 2's permission to liquidate property 2, and lender 1 would be second in line after lender 2 for sale proceeds, so if you're at > 60% LVR on property 2, it's unlikely it would happen.

If the same lender holds both mortgages, however, you've already contractually agreed that the value of both assets (ie property 1 and property 2) - plus any cash or shares or other investments held with that institution - can be used to cover all your loans with that lender, so it makes it cheaper and easier for them to liquidate property 2 if you "come up short" on loan 1.

Hm,

Correct me if I am wrong, but wasn't it Daz that had a very big problem with X-Coll at the beginning of the Eco crisis?

He wanted to sell a property that was X-Coll and bank the proceeds - allowing for some cash-flow in tough times.

The bank had other ideas and was not going to release the money to Daz, but top up his other X-Coll loans to lower the LVR to reduce THEIR risk.

It all comes down to control and how much you want.

If you are happy letting one bank decide the valuations and maintain control over multiple assets- then great.

I do not, will not ever trust banks. Too many eggs in one basket can cause alot of pain when/if things go wrong.

Regards JO

You're quite right, Jo. It can be problematic even when things don't go wrong.
However, it's all about finding the path to where YOU want to go and not being bound by the "rules" set by others who have different agendas, circumstances, objectives etc.
I no longer have all my eggs in one basket. However, my basket would be a whole lot smaller had I not coloured outside the lines and broken a few of the conventional rules along the way.
There's no right or wrong. Only what's right for YOU. Even that can change over time, too.
Like Bruce Lee used to say .. "Don't get set into one form, adapt it and build your own, and let it grow, be like water. Empty your mind, be formless, shapeless — like water. Now you put water in a cup, it becomes the cup; You put water into a bottle it becomes the bottle; You put it in a teapot it becomes the teapot. Water can flow or it can crash. Be water, my friend."

josko said:

Correct me if I am wrong, but wasn't it Daz that had a very big problem with X-Coll at the beginning of the Eco crisis?

He wanted to sell a property that was X-Coll and bank the proceeds - allowing for some cash-flow in tough times.

The bank had other ideas and was not going to release the money to Daz, but top up his other X-Coll loans to lower the LVR to reduce THEIR risk.O

Click to expand...

True story, but then again, Dazz could never have grown to the size he has without the support of his Bank, and unless they had all his assets tied up, they wouldn't have been so supportive...

I'd still rather have (say) $20M in assets and have the Bank temporarily prevent me from growing further - only temporarily because once the values on the assets are strong enough, you can split it all up again by refinancing - than have $2M in assets that are all neatly compartmentalised.

And that can be the kind of difference that cross-collateralising can make; lenders are willing to be a lot more "supportive" when they have knowledge and control of everything. At least until you've reached their comfort level - as Dazz did. Then you have to sit and wait until you have enough equity to take back control.

If you build slowly and patiently over decades, you can get that big with everything neatly compartmentalised as you go. But x-coll is the easiest way to grow big quickly.

ozperp said:

The argument for cross-securitisation

Giving the lender more control over your portfolio decreases their perception of the risk of carrying your business, and thus may mean the lenders will be more aggressive in lending to you. They may go to higher LVRs for a large portfolio if they have control over all of it.

Click to expand...

A good summary of the situation Tracey - well done!

I like your use of the word "may". I have found some lenders quite keen to get a slice of the action even when another Bank holds the best asset/s. In particular it depends on how individual banks test your existing loans in their serviceability calcs. The variation between how Banks do this never ceases to amaze me.

If you have fixed I/O loans some seem to just take what you are paying on the loan while others don't care and apply P&I with a much higher IR to test it. Of course how you look in a serviceability test is very different depending on which approach is used!

Apart from this, I have found your statement is "generally" true up until you have about $2m in loans with them. After that they become much more hard nosed and the smiles turn into frowns! In which case a better outcome seems to be achieved through spreading the loans around... which can be very difficult (but not impossible) if you are already crossed up with one! It's a case of thinking about the future and having more control if you can get it.

ozperp said:

But x-coll is the easiest way to grow big quickly.

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You're too quick!

Agreed - but the same outcome can often be achieved along the harder road - it definitely takes more work but it is ultimately a less risky path for the investor.

How do we class 'secured by'?
does that mean there is 1 loan, for 2 properties?

if one pulled equity from lender 1, from property 1, and 'upped' his loan on property 1 to fund the deposit of number two, and used the same lender for property 2. property 2 has its own individual loan but the deposit was funded by property 1,

This is not X-coll right?

Your example sounds like it's NOT X-Coll.
Keep it simple. Just go back to the actual security for the loan. 1 title on the mortgage docs = not x-coll. 2 titles on the docs = x-coll.
Doesn't matter where the money comes from or goes to, really. That approach just complicates things. Maybe leading to some confusion on the issue?
It's a bit like interest on the loan being deductable. It's what the loan is used for that determines that, not the underlying security for the loan. Different question, I know, but it keeps coming up as a question on the forum, for some reason. Usually because people take a complicated view of the question.

Aha! thanks for that Rob!

I think you're right, I'm over complicating by looking at where the deposits are coming from.

Its that simple, no wonder others were getting it but I never could.

Thanks mate.

Rob's already said it; just thought I'd add my agreement. It's true that when you're talking about collateralisation, it's only the SECURITY for the loan that's relevant; not the PURPOSE of the loan proceeds. (Tax deductibility is the opposite: purpose is everything, security is irrelevant. Perhaps this is where some people get confused?)

Just to be completely clear, if you have spare equity in property 1 that you want to use as a deposit for property 2, there are two ways to achieve that:

1) Draw extra equity out of property 1 as cash, use that cash as a deposit on property 2, and get a new loan for the 80% needed to buy property 2, secured against property 2 only. This is not x-coll. If your business is relatively low risk with regards to LVR, then this leaves you the most flexibility and is what you should try to achieve - even if you're taking out the second loan with the same lender.

2) Contribute your equity in property 1 as a deposit, without "redrawing" the loan on property 1. In this case, loan 1 stays the same amount, and you take out a new loan 2 for 100% of the purchase price, that's secured by property 2 and property 1, and you are x-coll. This may be more desirable if you are at high LVRs, or, if (for example) you've fixed loan 1 at a very low interest rate and risk losing that great rate if you refinance it.

It is confusing, I agree, but it's important that you, the borrower, understand exactly how things are being set up, and how that affects your future plans. There's no one right way to do it, but there are better and worse ways to do it for your particular circumstances, and unfortunately, the broker and/or lender either 1) may not know what's most appropriate , or 2) may have conflicting priorities (eg lender always wants to x-coll if you'll let them get away with it).

The buck ultimately stops with us as borrowers, to know just how much control we're surrendering to the lender, each time we take out a new loan, and whether that loss of control is a reasonable price to pay for having access to those funds.

We're xcoll, and I want to sell a property next week. Or at least before July anyway Seems I'm up for all sorts of interesting fees.

Want to build a house next door and not bring the other property into it at all next time, but I have absolutely no idea how much I need as a deposit, which isn't helping my case trying to work out what to put in which loan and when.

But on the upside, I have little pink survey pegs now! One step closer to a new house!