Cross-Collaterisation - Does it matter?

[Peter_Tersteeg]

1. Cross collateralisation reduces the amount of funds a borrower can qualify to borrow,
2. It then also reduces the number of investment
properties a borrower can buy

Whilst I agree with the sentiment, and they certainly are risks associated with x-coll, technically speaking this isn't true.

X-coll neither reduces nor increases how much you can borrow, nor does it change the number of investment properties you can buy. What it does is it takes away your flexibilty to move and choose different lenders.

Your borrowing capacity should be the same with the CBA regardless of if your portfolio is crossed or not. Crossing only means you can't easily move to the NAB when the CBA won't lend you any more.

 

[perthguy]

Whilst I agree with the sentiment, and they certainly are risks associated with x-coll, technically speaking this isn't true.

X-coll neither reduces nor increases how much you can borrow, nor does it change the number of investment properties you can buy. What it does is it takes away your flexibilty to move and choose different lenders.

Your borrowing capacity should be the same with the CBA regardless of if your portfolio is crossed or not. Crossing only means you can't easily move to the NAB when the CBA won't lend you any more.

Page 2 of the document I linked to outlines both reduced capacity to borrow and how this may affect the number of investment properties an investor can purchase. If there are any errors in their analysis, I would be interested to hear them.

http://www.deden.com.au/pdf/Cross-Collateralisation.pdf

 

[Dazz]

OP long story short don't x-coll if you wish to build a large property portfolio.

I'm happy to read a very long story if you wish to write one.

Taking your own advice Brady, how did you go ?? I see you've just settled on your 4th IP. Perhaps just a tad too early to gong the bell on what works best over the long term ?? I didn't take your advice.

Hell, I've read literally volumes on the subject over the years on this forum over dozens of threads on this subject.

All of the advice says the same thing. Don't x-coll.

There are so many reasons why you shouldn't x-coll and really the benefits of doing it are pretty much none existant in my mind.

I've found the exact opposite over the decades. I'm very happy with the way our x-colled portfolio turned out. Wouldn't of had any of it without it. Each to their own.

I disagree with your notion Rolf. Results speak louder than sage advice, imho.

 

[Brady]

I'm happy to read a very long story if you wish to write one.

Taking your own advice Brady, how did you go ?? I see you've just settled on your 4th IP. Perhaps just a tad too early to gong the bell on what works best over the long term ?? I didn't take your advice.

Hell, I've read literally volumes on the subject over the years on this forum over dozens of threads on this subject.

All of the advice says the same thing. Don't x-coll.




I've found the exact opposite over the decades. I'm very happy with the way our x-colled portfolio turned out. Wouldn't of had any of it without it. Each to their own.

I disagree with your notion Rolf. Results speak louder than sage advice, imho.

Dazz if I wasn't just looking at SS between swims and drinks in Koh Samui at the moment I could write away of the reason not to x-coll.

Please tell me how having your portfolio x-Coll has helped you over not having it crossed, that might save some time.

 

[stumpie]

Rules To Keep Your Borrowing Tax Deductible
1) What the borrowed money is used to buy determines deductibility, not where it is secured.
2) Interest on a loan is deductible if the borrowed funds were used in relation to a property that is now income producing.

http://www.bantacs.com.au/booklets/Claimable_Loans_Booklet.pdf

So, starting with a PPoR worth $500k that has no debt and buying a $450k IP to rent out, I would need to borrow $485 total. I don't want to pay LMI so the most I can borrow on the IP is 80%, or $360k. I will finance $125k with a loan secured against my PPoR to buy the IP.

Loan 1: $125k secured against my PPoR
Loan 2: $360k secured against my IP
Total: $485k

IMO, better than borrowing $485 against the IP and cross-collateralising with the PPoR.

PerthGuy,

what happens if the PPOR has an outstanding loan against it? for example; let's say the PPOR is worth 500K and there's an existing loan of 250K, in order to buy the IP without x-coll you'll need to access the equity in the ppor. whats the approach to refinance the ppor and keep the record keeping clean?

 

[Aaron_C]

PerthGuy,

what happens if the PPOR has an outstanding loan against it? for example; let's say the PPOR is worth 500K and there's an existing loan of 250K, in order to buy the IP without x-coll you'll need to access the equity in the ppor. whats the approach to refinance the ppor and keep the record keeping clean?

Have 2 splits. One of $250k and the other split for the remaining equity.

 

[stumpie]

Have 2 splits. One of $250k and the other split for the remaining equity.

Gotcha Aaron... cheers.

 

[perthguy]

Have 2 splits. One of $250k and the other split for the remaining equity.

^^^ this. My bank is happy to do splits and it keep non-deductible debt and deductible debt separate.

 

[tobe]

Dazz if I wasn't just looking at SS between swims and drinks in Koh Samui at the moment I could write away of the reason not to x-coll.

Please tell me how having your portfolio x-Coll has helped you over not having it crossed, that might save some time.

I doubt you will get a specific response. Look up some of his previous posts on the subject. My recolection is his bank was able to lend him 'extra' for a commercial property, having all of his residential portfolio.

Now, we cant really verify this was the only way it could have worked, and obviously both his banker and he think it was a special deal only available to the special clients that xcoll. As they are the only witnesses, we will have to leave it at that.

What we can verify is Dazz has made it, and has runs on the board. I dont think Dazz is advocating everyone xcoll, just those 1% who are actually going to achieve financial independance in a timely fashion, that is make the switch from residential to commercial property investing.

 

[Brady]

I doubt you will get a specific response. Look up some of his previous posts on the subject. My recolection is his bank was able to lend him 'extra' for a commercial property, having all of his residential portfolio.

Now, we cant really verify this was the only way it could have worked, and obviously both his banker and he think it was a special deal only available to the special clients that xcoll. As they are the only witnesses, we will have to leave it at that.

What we can verify is Dazz has made it, and has runs on the board. I dont think Dazz is advocating everyone xcoll, just those 1% who are actually going to achieve financial independance in a timely fashion, that is make the switch from residential to commercial property investing.

Just got back from holidays yesterday, thanks for input tobe. Was expecting from dazz but was response I expected regarding commercial.

All of the business bankers I know all look to x-coll more so than bankers. That's fine gets the deal done, but I think it would be in the clients interest to have it not crossed.

Well done dazz x-coll worked, but I don't think it was what assisted you, rather the ability to purchase good investments helped you. Whilst you make good purchases x-coll isn't usually a issue as the portfolio has increased. Happy to leave it at that as no doubt dazz would of input if he thought it was worthwhile.

 

[geoffw]

Xcoll is a tool which can work well, but it is a tool which must be used with care, is it can cause problems in some circumstances when it's time to move forward again.

If you're already as far as you need to go, then that is not a concern.