We are of the opinion this subject is a complete furphy...however the hell you spell that...., brought on by self interest 'groups' whose business objectives are further enhanced and made easier by having clients who aren't crossed.
Ten disadvantages of Cross-Collateralising your property portfolio…
#1. When you sell a property in a cross-collateralised structure you may not see any of the funds as the bank may request some or all of it to go back in against the existing loans to strengthen their position. They don’t need your permission either. Picture this you’re releasing one of your properties for an opportunity or worse still a bind, and the bank deducts funds to strengthen their position. Where would that leave you? I have seen this happen to some very asset strong and successful property investors. Answer given, Bank Policy!
Don't sell.
Resp: But some people want to sell, or need to for various reasons. SS is proof enough that everyone has a different strategy and exit plan
#2. When you sell a property you have to resign all of the existing mortgages. Extra unnecessary paperwork.
Don't sell.
Resp: as above
#3. You can loose product selection and control by being with just the one bank. For example the bank can say no more interest only loans for you, we want you to take a Principle and Interest loan from now on, to reduce your debt with us. This is quite common when your borrowing levels get up with the one funder.
Don't know what the definition of "get up" is, but we haven't found this to be the case. Also unsure about "product selection", the only "product" our Bank pumps out is cash. Must be an insider term.
Resp: I am mainly with ANZ but when I refinanced a property recently, and were only eligible for a lo-doc loan (down to one income at the time) we didnt meet the ANZ criteria. So we went to the NAB. People are with all sorts of banks because of lending criteria that suits them at the time. Again, everyone's circumstances are different.
#4. Bank holds far more security than often necessary, for example Property A worth $800 000 is used to buy property B for $250000. The bank has $1 050 000 of assets against $250k of loans. The result is that the bank holds all of your cards.
We reckon the Investor needs his head read if he's investing in a little 250K prop if he has 800K free equity available to him. Investor's fault, not Bank's.
Resp: Yet again, its the strategy of the investor. Just because they've got $800k available, doesnt mean they have to use it all, or use it all on one property
#5. Buying across state boarders you are subject to mortgage document stamp duty of that state, this in itself is OK, but when you have other properties as security for the purchase, regardless of the state they are in you may have to pay the mortgage document stamp duty on the entire loan amount, rather than just on your purchase price. For example, purchase property A worth $300,000 in QLD but for whatever reason you have offered another property as security and it is worth $500,000 in the ACT, you would have to pay mortgage document stamp duty on the whole portfolio of $800,000 and this is because the entire mortgage document has to be stamped in QLD. This duty is a state duty and is different in every state or territory. An example of the difference in the amount payable can be, where the stamp duty is $4 in a thousand, for the cross-collateralised mortgage document stamp duty you are up for approximately $3,200, but if you had your purchase as a ‘stand alone’ loan you will have to pay approximately $1,200 . If you need to find out more about this point, please give us a call.
We're too scared and have never ventured out of our little area, so unaware of the big bad world across borders. Not qualified to comment.
Resp: I'm in two states, and planning a third. Would have to have this happen to me!
#6. Having at least two lenders gives you the flexibility of playing one off against the other, giving you more choice an ultimately more control.
We take the attitude that our Banking partner is our greatest investing ally. For the last 12 years they've also taken that approach and we feed off each other, for mutual benefit. The very last thing I'd do to my investing partner is start "playing one off against the other". We check the cost of the cash, but no-one has managed to beat the prices offered so far, and the service has been red carpet all the way....so far. If we pay the mortgage payments, they leave us alone.
Resp: Agree here. You can always play one off against the other with a phone call. You dont actually need to be a borrower with them to do this.
#7. If you want to realise some increased equity when properties have grown in value you need to have your whole portfolio revalued (multiple valuations instead of one, again an additional and unnecessary cost).
We've just been through this exercise, and it's actually a very good thing. Spend miniscule amounts to re-value your whole portfolio and use the increased equity to go again. This is the very best thing about property and using the leverage available. I cannot understand how this could ever be a 'bad' thing.
Resp: Agreed, sort of. You can squeeze every last bit out of the portfolio as a whole, but once you're up around 20, 30, 40 or more properties, this gets kinda annoying, surely.
#8. You can run out of borrowing capacity with one lender when you reach their maximum serviceability / exposure levels.
We haven't experienced this yet....and hence cannot really comment further. I do know the Bank is in the business of lending money. We've never discussed maximum levels, 'cos the goalposts keep moving northwards thankfully.
Resp: Again, people's circumstances are different. And so do banking criteria. When I've run figures with a MB, I'm amazed at the difference between what different banks will lend me.
#9. It is so much harder to move banks, if you no longer like or agree with their service or lack of.
Being partners in crime together - joined to the hip if you will, we show mutual respect for one another and support each other. The service is outstanding from every angle. Many phone calls, one point contact, quick email turnaround, personalised service, the odd lunch together (sometimes the bank pays, sometimes I take the Bank out).
Resp: I've never met someone who trusts their bank as much as you do. I do hope they dont let you down.
#10. If you have cashflow problems, your whole portfolio is at risk. Better risk management from your respect is to not cross.
No, I reckon the better risk management is to either get a better more secure paying job and/or a better tenant set where the income stream is of investment grade, such that the Bank has confidence to allow 100% of the rental income as servicable cashflow.
Resp: A higher income or better tenant is good for risk management. But so is spreading loans between banks. There are many ways to manage risks. Both are valid.
Happy investing.
