Any drawback on cross security loan?
- Thread starter kennyboi
- Start date
Bloody hell mate. Of course there is. Bank can take 2 houses instead of one if you default.
Do a search and look for an old post of mine where i described a guy who went bankrupt because of cross security.
I think the title should be changed to, "Are there any advantages of cross security loans?"
Using multiple securities takes away a lot of flexibility, a lot of choices. It doesn't give you better pricing, it's rare that it makes a difference to the actual ability to qualify for the loan. It gives every advantage to the lender and almost none to the borrower.
About the only circumstances where we cross collateralise is when a family guarantee is needed. Even then we structure things to ensure the secondary security is removed as soon as possible.
Outside of this, over more than 10 years in the industry and thousands of loans, I think I've recommended cross collateralising about 3 times in total.
Using multiple securities takes away a lot of flexibility, a lot of choices. It doesn't give you better pricing, it's rare that it makes a difference to the actual ability to qualify for the loan. It gives every advantage to the lender and almost none to the borrower.
About the only circumstances where we cross collateralise is when a family guarantee is needed. Even then we structure things to ensure the secondary security is removed as soon as possible.
Outside of this, over more than 10 years in the industry and thousands of loans, I think I've recommended cross collateralising about 3 times in total.
Being on these forums for probably a little under a year now I think I have read I'm going to say about 500 posts regarding how bad xcoll is.
So no offense to the poster but when I read the topic I actually thought they may be trolling
That being said I have heard from 2 sources that xcoll is good. Those were Margaret Lomas in a book of hers I recently read and also a BA in a seminar for alliance corp.
So no offense to the poster but when I read the topic I actually thought they may be trolling
That being said I have heard from 2 sources that xcoll is good. Those were Margaret Lomas in a book of hers I recently read and also a BA in a seminar for alliance corp.
In my situation I chose to cross to avoid commercial interest rates on 20% of my financing as I was using a commercial property as a secondary security on residential property.
I could have
a) Paid the premium of a commercial loan on 20% of the lend
b) Paid LMI up to a point eg 88% and still paid a premium on a part commercial loan
c) Borrowed 100% against residential, with the crossed commercial for an overall LVR < 80%
I chose c)
Totally agree with the sentiments in this thread though. Most of the time, two separate loans with an 80/20 split is the best approach.
I could have
a) Paid the premium of a commercial loan on 20% of the lend
b) Paid LMI up to a point eg 88% and still paid a premium on a part commercial loan
c) Borrowed 100% against residential, with the crossed commercial for an overall LVR < 80%
I chose c)
Totally agree with the sentiments in this thread though. Most of the time, two separate loans with an 80/20 split is the best approach.
and that makes sense.
I dont expect anyone ( here at least) to have a dogmatic approach to no xcoll per se.
We use Xcoll or retain it for legacy/inherited clients once a week at least.
ta
rolf
I dont know if you'd get the same response from ML these days.
Remember, what was once fashionable or sensible at the time, is now proven to be a no no.
Cigarette Smoking is one such thing, but with the speed of information and product change, even in financial circles some things that were once "great" arent so now.
- Agri Investments around tea tree plantations
- Endowment Backed Mortgages in the UK
- Borrowing 90 day wholesale bond money on the market and chopping it up and lending it over 30 years.
- Buying and building bus loads of resi stock in mono industry towns for the high rent returns
Overly simplistic I know, but often we want to see more complications than there really are
Xcoll has been on the nose in my view for well over 10 years.
http://somersoft.com/forums/showpost.php?p=120656&postcount=6
As to alliance corp seminar - im sure they have their reasons as to why they recommend xcoll.
Even in the financial services indurty most peops (if not dogmatic), once educated and removed from the xcoll brainwashing for a little while actually work out that it doesnt serve them or their clients.
- The easiest and honourable way is to ask your client to choose...........
- On the left side of the 4 Sheet, you place the cons
- One the right side of the A4 sheet, you place the pros
- Then explain what the pros and cons actually mean in their specific scenario.
- Then confirm they understand, and then ask which they prefer...........
Where I come across clients that have been crosed, most of the time this vital information is withheld from the client.
Knowingly witholding information from a client that may affect their financial future in a negative way is unethical, and bordering on malpractice.
ta
rolf
I think its because many operators/providers don't actually know the difference - I'd guess they'd just assume its the same between crossing and taking out two loans against individual securities.
The way lending works, if you own two properties at 80% LVRs where one is worth 100k more than original value and the suspect the other is 100k less - if you have cross securitised your loans, there is no ability to draw equity out from here.
In contrast, if you've set up individual loans for each individual security, you may keep the flexibility of drawing out the 100k from the property that's gained in value (assuming you're not in negative overall equity).
The above also highlights the value of diversifying your investments. For the experienced investors, the options that become available during down markets is often where they purchase their best investments. Generally, they need to be able to access their equity to be able to purchase.
Cheers,
Redom
Hey Rolf,
The BA seminar I believe was using it to sell the simplicity of property investing. "You own 3 properties, go to the bank and get them easily revalued, market has moved upwards 10k on each property so pull the equity and pool it into your equity account and whoalaa 30k deposit to go again".
It was drawn nice and neatly on the board and to the uneducated it made a lot of sense. What they failed to mention however is the 10 negatives you outlined in your link. They failed to talk about serviceability issues and ofcourse what happens if the market has gone backwards, or if one propery has gone up but another has not.
The BA seminar I believe was using it to sell the simplicity of property investing. "You own 3 properties, go to the bank and get them easily revalued, market has moved upwards 10k on each property so pull the equity and pool it into your equity account and whoalaa 30k deposit to go again".
It was drawn nice and neatly on the board and to the uneducated it made a lot of sense. What they failed to mention however is the 10 negatives you outlined in your link. They failed to talk about serviceability issues and ofcourse what happens if the market has gone backwards, or if one propery has gone up but another has not.
