Cross-collateralised Investing

[Shirley]

It might be useful for one of the experts on the forum to explain a bit about cross-collateralisation (at least it would be for me!)

Our loans are cross-collateralised (I know, it's a big NO-NO!) but they were set up some time ago. The National has us well and truly tied up but I'm not particularly worried as our capital gain has been very nice and it's unlikely that we'll get into strife! I believe it would be quite expensive to separate our loans at this stage.

As my other half points out, at least we can claim the interest on all our debt with the set-up we have. Is this the case when you draw the equity in your PPOR as deposit on IPs so you can keep the loans separate?

Does cross-collateralising limit your potential for borrowing? My other half tries to convince me that the reverse is true and that we would have fewer properties if we hadn't!

Many thanks for any advice
Shirley

 

[Tim]

Shirley,

my experience with the National is that they are very keen from a lending policy perspective on cross collateralisation, more so than quite a few other banks. This has everything to do with their security and nothing to do with yours. Now that I have multiple properties with the National, which are all x-coll, the National has happily told me that they don't really want to lend any more money.

The issue with this is, that if I want to sell any of these properties, the NAB can at their discretion take the surplus funds from the sale to pay down other loans (which wont necessarily reduce my payments unless I refinance, speaking from experience).

X-Coll is not a good idea if you can avoid it, and what I am trying to do is now is un X-Coll my PPOR from the bundle. NAB have (reluctlantly) verbally agreed to do this, if I send them a letter requesting this. If I can un X-Coll properties then I can refinance them with other lenders who will be willing to lend additional funds, whereas the NAB wont.

My feeling on NAB's X-coll is one of (not knowing what I was doing and what they were doing at the time), that it is a very limiting situation to X-coll.

Hope this sheds some perspective on your situation.

Tim

 

[D.T.]

Hi,

You're best bet is to check out the pro's and con's post, posted by Rolf Latham in the following thread.

http://www.somersoft.com/forums/showthread.php?t=17677&highlight=cross

He's quite the expert on x-coll.

 

[Rolf Latham]

Hi Tim

With the NAB they do like maximum contribution and until recently it was policy. Like it or lump it almost.

As investors get a bit more savvy and times for the banks arent as good all of a sudden they become much more flexible in their policy.

Just did a loan last week where we asked the bank to xcoll :O), they nearly fell over. It was one of those instances where it was very beneficial for the client since it meant not having to pay lmi again, yet pulling maximum equity at the same time.

ta

rolf

 

[Nominees]

As my other half points out, at least we can claim the interest on all our debt with the set-up we have. Is this the case when you draw the equity in your PPOR as deposit on IPs so you can keep the loans separate?

If you use the equity from your PPOR to buy IPs then YES, you can claim the interest. The important rule is "What is the money being used for?" If it is for investment purposes then you can claim the interest, no matter where the money comes from. If it is for personal use you can not.

Does cross-collateralising limit your potential for borrowing?

Yes, definitely in the long run.

Ed deals with X-coll in quite some detail on his new website (www.loansapproved.com.au). One of the case studies seems very similar to your situation.

X-coll becomes really nasty if you are thinking of buidling a portfolio of properties. If you do not intend to buy anymore properties you should be fine though. I guess it all depends what your goals are and what you want to do in the future.

Nom

 

[Tim]

Rolf,

that's a good point about the LMI, hadn't thought about that to be honest. On another note, do you have a idea of what reasons are going to be most palatable for NAB to un X-coll ... I am drafting my letter and thinking "what should I be saying that will work best for them to do the UnXcoll on my PPOR, as they have verbally agreed to at the local branch level...."

Any thoughts appreciated!!

Tim

 

[Rolf Latham]

Hi Sponge :O)


If your post excision LVR is 80% Id ask why dou you want more security than any other bank ?

Please, pretty please give me the title deed to my home otherwise my wife will leave me, AND I will leave you - no other lender insists on Xcoll like you do AND some offer a 6.37 IO rate as well with a 100 % IO offset acct ?

What do you say ? Retain the majority of my business OR lose All of it ?

ta

rolf

 

[Tim]

Rolf,

I get the idea - thanks! I will do something that gets to the point with a "diplomatic twist of lemon" for them!

Tim

 

[Tim]

This should do the trick


As per our discussion, this letter is to request that the National Australia Bank remove the cross collateralization on my principle place of residence at XXXXXXXXXXXXXXXXX, loan number XXXXXXXX

In light of the recent valuations undertaken by the National against the properties I hold, and considering the existing overall loan balances with the National, I believe that there is adequate collateral such that the principle place of residence could be released from cross collateralization without any undue risk to the National. From my perspective as a customer of the National I see this as prudent step towards separating investment from personal/lifestyle loans.

I would appreciate it if you could arrange for this to take place as soon as is practical, and trust that the National are able to assist in this matter allowing me to maintain my current position with National as preferred lender.

 

[Rolf Latham]

Hiya Tim

Diplomacy is telling someone to go to hell in such away that they enjoy the trip :O)

Looks good, id add that the retained LVR is what it actually is say 73 % or whatever


If that doessnt work get me te details of your NAB guy/girl and I will send them an email on your behalf :O)

Ta

rolf

 

[quiggles]

I offered x-coll to a US broker yesterday.

My wife nearly fainted dead away.

When the broker said "Oh, we used to do that, but we don't anymore.", I nearly did the same.

 

[Investor Chick]

Trying to get my head around Xcoll

Our loans are cross-collateralised (I know, it's a big NO-NO!) but they were set up some time ago.

Hello all.
I am still trying to work out why so many people are dead against cross-collateralising, and what is the best way to structure things from the start to avoid complications down the track.

Having read Rolf's pros and cons list (correct me if I'm wrong) I gather that the disadvantage is that some lenders get to a point where they refuse to lend you any more money if your LVR is above a certain point. And when you're forced to change lenders (to get more money or a better deal) you can incur fees for breaking your loan as well as having to pay mortgage insurance.

I am about to get a second property and my mortgage broker says the easiest way is probably just to Xcoll on my first property. I have $60K equity in the first property which is worth $200K. I gather my options are:

1. Xcoll and keep it simple
2. Go to different lender and they use my first property as security (they take a second mortgage on it behind the other bank, and I think the first bank charges a small fee if you do that)
3. Get a line of credit on the first place to fund deposit for second place (but in doing so get charged a higher rate of interest, which doesn't seem that attractive to me)

Am I missing any options, or misunderstanding the above options?
And in these early stages, does anyone have suggestions about an effective way to structure things? I'm not going to be acquiring all that aggressively - maybe just one property per year on average.

Cheers

 

[Rolf Latham]

Hi IC

At 1 IP a year you will be free very quickly.

There may be good reasons why your broker is suggesting the xcoll.

Maybe it reduces his paperwork

Maybe its due to LMI

Maybe its a forced condition of the lender

Maybe its due to the moon being blue this week.


When someone tells me its easier, I always ask for whom ?

On the upside its only your second IP, and it probably wont make a single difference to you, for now, ..........much like smoking cigarettes :O), some people say its no problem, yet general concensus and anecdotal evidence suggests that its probably not a good idea.

ta

rolf



ta

rolf

 

[Investor Chick]

options

Thanks for your comments Rolph.

To avoid those problems down the track, what are the options now?

I gather the choices are:
1. Line of Credit to provide deposit for future properties.
2. Just get a second mortgage on the first property, but do it with a different lender.

Is that right?

Cheers
IC

 

[Rolf Latham]

Hi IC

Forget the second mortgage bit.

A LOC will do the job, but there are some other loat type/ structuring options depending on your cirumstances.

ta

rolf

 

[Mr Ed]

IC,

I was going to do a long post on X Coll then thought against all the typing.
So here is a pdf that I regulary email to clients when they ask about X Coll, I hope you find it of some use.