Cross-Collateralisation - Yay or Nay?

[cams.r.m]

Hi Everyone,

Love the forums here and really enjoy the advice my PI comrades have (unknowingly!) imparted to me
I'm fairly new to the PI game so please forgive my rookie-esque naivety here, though I'm in a bit of a bind and would love some feedback/advice. You guys are awesome and are literally living the PI dream so would love to here it!

Here's the conundrum;

As most of the industry guru's say, one of the most important elements (if not THE most important) is the finance setup, before you even start doing any actual property research, right?

So, I only have one property; my PPOR which is currently setup as a P&I loan. The property value is $260K and the mortgage left owing is currently $138K.

Whilst this property is currently my PPOR, I intent to convert it to an IP in the next two months (planning to rent-share with friends elsewhere).

I've got a good $70K in equity that I plan to extract to use as a deposit on a second IP (meaning the mortgage on this first property will go up to $208K, still sitting at 80/20 LVR which is good).

Thing is, I met with my bank currently financing my loan. I can draw down this $70K no worries, but I can only do it if I cross collateralise both properties. I've been given a mixed bag of feedback/advice from friends on this; in short, is it bad? I don't like the idea of the loan being split across both IP's, but i do like the fees etc I avoid by keeping it under the one banks' roof outweigh the risks/negative (unless you guys can give me some negatives on doing this?)

My strategy is buy and hold so it's not like i'd be selling one of them off any time soon (and hence needing to refinance that loan at a high admin cost to do so).

I know it's in this bank's interest to advise on cross-collateralise, but is it a good or bad move to stay with this bank for IP #2? I'm getting a quote from a second lender and a statement of fees etc involved in setting them up as two separate loans etc, but it's looking more costly (though perhaps some of these finance costs are tax deductable expenses?)

FYI, my 'grandeur' PI dreams are to uptake 1 IP per year for the next ten years, so will cross-collateralistion come back to bite me on the bum when i get to IP #3, or #4, or #5? Will it make getting finance harder?

It's tough because i'm keen to get into the market for IP #2 but can't even LOOK until I get over this obstacle!

Would love to hear your feedback and even any experiences you can draw on to help me out.

Thanks guys and happy PI-ing

Cam


***Those who say it cannot be done must not interrupt those doing it***

 

[tobe]

Usually the first couple pof properties being xcol arent a problem. There are some interest rate and app fee savings, and everything seems to sail smoothly, and its sooo easy just having one bank to deal with, and the lending manager seems to really value your business.
For the small percentage of investors who go on to own more than 2 investment properties xcol can impede their growth. This can usually be fixed up by a competant broker, usually over a significant timeframe, and usually at some exit costs, or maybe having to sell one or two properties at eh very worst...
The interest and fee savings attributed are not solely because the properties are xcol. Pro pack discounts can be had when you have sperate securities at the same bank, basic variable loans have similar rates and fees to the discounts on a pro pack. If you think you might go on to 2 or more properties, I suggest doing a little more research on structure, either with another broker or two, or reading. There is a good book by Stuart Weymas who is a member here which I thought gave a very good overview of the finance environment in Australia. Good Luck!

 

[Rolf Latham]

ur goals are not compatible with the cross coll idea.

Sooner or later you will outgrow what your lender sees as normal, and then the fun starts

Dunno who said it, but the bonds of a bad habit can not be felt until they are too strong to be broken.............

Start with self secured loans UNLESS there is a good reason not too

ta
rolf

 

[Dazz]

Start with self secured loans UNLESS there is a good reason not too

How's that for a good reason Rolf ??

i'm keen to get into the market for IP #2 but can't even LOOK until I get over this obstacle!

 

[morg]

also consider changing your current loan to interest only and get a valuation done to establish a cost base for CGT.

 

[VYBerlinaV8]

I have a few X-Colls, but not the whole portfolio. I don't think it's a problem as long as you manage the risks, and understand that you will eventually hit a wall with your lender.

 

[Rolf Latham]

one smoke wont hurt you............

I can quit anytime

Some can, many cant.


The concern is that for one person xcoll isnt an issue under their circumstances, yet for another person under diff circumstances it could prove quite toxic.

ta
rolf

 

[Luv2Travel]

Is it easy to get rid of the x-coll? I have my PPOR tied to my IP, which for me I don't believe will be an issue as I have no intention of selling my PPOR. I only did it to avoid LMI as I borrowed 100% but had plenty of equity in my home. Once my IP has increased sufficiently and I have more than 80% equity in that, is it easy to remove x-coll so the IP becomes stand alone?

 

[Rolf Latham]

usually yes, easy peasy.

The challenge comes when its not so easy, and the circumstances that may casue that are yet unknown.

So I suppose you dont have a problem until you have a problem

ta
rolf

 

[cams.r.m]

Hi Rolf and all the other repliers to my topic,

Thanks very much for your insight! I'm going to crunch some more numbers on this and then have discussions with my current lender regarding how far on the 'journey' their xcol will let me travel.

One things for certain, regardless of what I do, the second I move out of this PPOR and it becomes an IP, it's going interest only straight away!

Keen to here more thoughts on this topic, keep em coming!

Love your work,
Cam

 

[wylie]

If it is going to become an IP one day, why not make it interest only now and put all your spare money into an offset account?

 

[Peter_Tersteeg]

In 99% of cases, cross collateralisation can be avoided.

When it can't be avoided, it really can't be avoided. The main reasons you might cross collateralise when it can be avoided are:
1) To save no more than $10 per month in additional account keeping fees. Usually the amount is less.
2) To allow parents to give an equity guarantee to a first home buyer without a deposit.

Every other benefit is either a benefit to the lender or can be replicated fairly easily. I've yet to see an interest rate saving which couldn't also be acheived without it.

 

[sash]

Hmmm.....sounds like the fly who wanted to fly pass the spider web to have a closer look!

My view is never to Cross Collateralise....once you do....you are at the banks mercy! They can refuse to let you refinance and do anything else they want...with very little reason....just read the contract.

Even with without crossing....the banks can still reach into other accounts if things go pear shaped. Finance structure is very important to building a sustainable property portfolio....otherwise you will hit a lending wall.

 

[redsquash]

Cross Coll is great if you try to borrow as much as possible and will not sell you properties or take advantage of their capital growth down the track.

Banks being conservative may restrict your ability to borrow against that growth for further investment.
If you are going to be an aggressive investor an can predict your plans, say up to 3 years ahead then X-Coll, otherwise I would try to have separate loans.
In my case having X-coll held me back by 2 years in getting another IP.
If I had my time again I would do the same thing due to my particular circumstances

 

[jezza]

Hi Everyone,

Thing is, I met with my bank currently financing my loan.

Cam

This is all you needed to write!

Why don't you get all your figures and send it to a broker that you know or is on this site ( I tend to say this site as they have experience with organising finance for "investors")

I don't agree with CC purely because it limits the opportunities in future/ ties you to one organisation/causes you grief if something goes cuppult with one of your loans/properties.

Would you have been surprised if your lender said - What you can do is we can revalue your property, ascertain your equity and set up up a LOC which you could use as a deposit and then borrow from any instution you wish. I bet you would, well the person you spoke to has an alliance to 2 things, there bottom line and there employers bottom line.

Jezza

 

[Y33]

Crossing has good points and bad but if it means getting the deal done and you are happy with the deal take it from there.

 

[Rolf Latham]

Hi Y33

In general, in your experience, what are the good and bad points for cross collateralisation (because everyone has different things to contribute) ?

ta
rolf