Cross-collateralization

V

Vitamin

hi,
i am curious. i learnt fr the forum that never to Cross-collateral IP and PPOR.
However, a friend of mine did that and the bank did give them 2 "seperate" loan account showing seperate interest paid on each account - which is easy for tax return

to be, apart fr the selling bit that can be messy. this seems ok.

what are your thoughts on this?

cheers,
Vitamin
 
I'm sorry, your message isn't very well written and it's unclear. I'm not sure what you mean by 'the selling bit'.

To avoid cross collateralising your PPOR and an IP, you will need separate loan account to access the PPOR equity. This is standard practice.

I have occassionally had people say that a second loan account is a pain, but I fail to see why. It keeps your investment transactions separate and makes life easier for accounting. All repayments can be direct debited from the same savings account automatically, there's nothing extra that the borrower actually needs to do.

Cross collateralising or using a single account for everything may seem less cluttered on your internet banking page, but it had the potential to a much larger headache at tax time.
 
Hi Peter, thank you for your reply. sorry for the lack of clear message and my lack of understanding in how these are set up. I was told by my friend that he has a loan on the new house (PPOR) and another seperate loan (IP). but the 2 properties are cross-collatered.

From what you mentioned, what are some issues of cross collateralising of PPOR and IP? or are there even any issue?
 
Vitamin said:
Hi Peter, thank you for your reply. sorry for the lack of clear message and my lack of understanding in how these are set up. I was told by my friend that he has a loan on the new house (PPOR) and another seperate loan (IP). but the 2 properties are cross-collatered.

From what you mentioned, what are some issues of cross collateralising of PPOR and IP? or are there even any issue?
Click to expand...

Big issues.

Imagine you friend needs to sell the IP. Since this IP loan is secured by the IP and the PPOR he will need the bank's permission to release the mortgage which is required to transfer title.

This can lead to all sorts of issues.
1. Timing. Say he doesn't know this and sells, signing a contract. A week before settlement his lawyer find out the lender won't discharge until a new loan application is done and a valuation conducted...

2. Default. Say he gets into financial trouble and cannot pay the loan. Lender could take possession of either property - without going to court too.

3. Financial trouble again. He lost his job etc. He could chose to sell one property and use the proceeds to get back on track. I had someone from this forum call me recently and he said this happened to him, but the $100,000 proceeds from the sale of property B was kept by the bank to reduce the loan on property A because they were worried about his financial situation.

This are just some of the potential issues.
 
We have separate loans for our cross collateralised properties. The only reference indicating they're x-coll is on the mortgage documents themselves, where the other properties are listed as security against the loan. You're not getting the full picture if you're only taking into consideration the mortgage accounts alone.
 
Thanks for clarifying. My interpretation does appear to be wrong, it looks like your friend is cross collateralised.

By doing this, your friend has linked the two properties together. What happens to one financially will potentially affect the other property. For example if one property is sold, the other property will be reviewed by the bank before they'll let the sale go through (in extreme cases, the banks have even blocked the sale of a property due to x-coll). If you default on the mortgage of one property, then both are at risk of being sold by the bank.

Avoiding x-coll means the property are financially separate. This gives you more flexibility and puts control in your hands, not the banks. Without this flexibility, you're more likely to get into trouble in your investing strategies than if you've kept things separate. With x-coll if your current lender decides they don't want to lend more money, you can't do much about it. If things are properly structured, you can more easily use a different lender.

The list of reason to avoid x-coll is very long. The reasons why it's in your favour is extremely short. I've only seen one example (out of hundereds if not thousands of loans) where it was in someones favour to x-coll a PPOR and and their first IP.

I've attached a summary of some of the reasons not to cross collateralise, i hope it's useful.
 

Attachments

  • Cross Coll handout.pdf
    91 KB · Views: 300
Hi all,

I bought IP #1 and then used it as security to avoid LMI on IP#2, before I learned this was not the right way to do things

They are on separate loans

I have a LOC of $50k on IP#1 and am about to apply for a LOC of $40k on IP#1 (keeping LOCs separate as the $50k I used as a deposit for a PPOR so want to keep non tax deductible debt separate).

Question, should I uncross properties before I do this?

How do you uncross properties? Does it just depend on the amount of equity you have in both?

Thanks in advance
 
xcoll isnt a problem at all.............


for the lender



and often its not a problem for the borrower either

but as most have some form of car insurance, I guess most people understand what "may" happen, and is in for example a broke person with no insurance writes your car off,its not caused by you, but effects you.

almost 10years old but still largely valid and now very incomplete

http://somersoft.com/forums/showpost.php?p=120656&postcount=6

ta
rolf
 
Pins said:
Hi all,

I bought IP #1 and then used it as security to avoid LMI on IP#2, before I learned this was not the right way to do things

They are on separate loans

I have a LOC of $50k on IP#1 and am about to apply for a LOC of $40k on IP#1 (keeping LOCs separate as the $50k I used as a deposit for a PPOR so want to keep non tax deductible debt separate).

Question, should I uncross properties before I do this?

How do you uncross properties? Does it just depend on the amount of equity you have in both?

Thanks in advance
Click to expand...

Uncrossing is always a good thing. If you had enough equity to get the loans without LMI, then you've got enough equity to restructure your finances properly and still avoid LMI. The specific figures and loan structures required will depend on several things such as the individual property values, the loan amounts involved and the use of the various loans.

There's lots of posts on avoiding cross collateralistion, but if you're not clear on how to structure the loans properly, you should engage the services of a broker who understands this to help you.
 
Rolf's point is a good one.

You never need insurance - until you need it!

Same with crossing loans. No (or a few) problems with it until you start to have problems...
 
Pins - if you are able to uncross now without LMI - then do it FIRST before you do anything else. The x-coll web gets harder and harder to untangle when there are more properties added into the mix with LMI and fixed rates etc.
 
Aaron_C said:
Pins - if you are able to uncross now without LMI - then do it FIRST before you do anything else. The x-coll web gets harder and harder to untangle when there are more properties added into the mix with LMI and fixed rates etc.
Click to expand...

Great thanks, I'll do that first.
 
This is probably a stupid question, but what it you go 50-50 in a property with someone else and they are planning to X-coll with their PPOR? We have the cash but I am not sure it they do, but then again they must have some equity otherwise the bank would not offer x-coll. They may just be trying to avoid LMI when drawing out equity.
 
Paying LMI is dependant on your equity level and has nothing to do with x-coll or not. If you can avoid LMI using x-coll, you can also avoid it without using x-coll. If this is the argument your friend is giving for wanting this structure, your friend is getting bad advice.

I'd strongly avoid x-coll in a joint loan situation. It puts both properties at risk of bad conduct from the other person. This is probably one of the riskiest things you can do in finance:
* If your friend doesn't meet his payments on his home even though you make sure the IP is covered, the IP is still at risk.
* If you get into trouble and default on the IP, your friends home is at risk even though he may have done everything right.
 
Jack3d said:
This is probably a stupid question, but what it you go 50-50 in a property with someone else and they are planning to X-coll with their PPOR? We have the cash but I am not sure it they do, but then again they must have some equity otherwise the bank would not offer x-coll. They may just be trying to avoid LMI when drawing out equity.
Click to expand...

Your friend can access the available equity in their property by increasing their existing loan and placing the increase in a SEPARATE sub account. The funds in this account can be used for their contribution to the intended 50/50 purchase and will avoid any x coll issues arising in the future.

There is no such thing as a "stupid question" just a stupid decision because you failed to ask the "stupid question".

Cheers.
 
Jack3d said:
This is probably a stupid question, but what it you go 50-50 in a property with someone else and they are planning to X-coll with their PPOR? We have the cash but I am not sure it they do, but then again they must have some equity otherwise the bank would not offer x-coll. They may just be trying to avoid LMI when drawing out equity.
Click to expand...

Perhaps good for you. If there is a shortfall the lender will come after the main security first then the collateral security and then you and them jointly or individually last.

Generally the same principals apply. If they can do it by crossing then they can do it by not crossing. They could borrow the money secured on other property and inject cash into the deal.
 
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