Cross collaterizing 2 loans plus P&I vs IO

Hi,

Just wanted to get some thoughts on the following situation my partner and I are in:

Purchased 1st home (sydney, nsw, now becoming IP) in 2010 415K, interest only loan
Loan Currently 332K

Wanting to purchase second home (also in sydney, nsw) soon, valued at around 500K - unsure whether to go for IO or Principal / Interest on this one as we may or may not move on from this property as we are doing with the first one.

Not enough savings to cover deposit + LMI + stamp duty + legals for 2nd property purchase, so mortgage broker has suggested cross collaterized option.

I.e. Total value of 2 properties will be roughly 915K, loans will be roughly 832K, total LVR 91% or so.

Is this a good idea - it seems the only option right now as we can't afford the costs any other way?

Also, is this a problem going forward, as we are interested in purchasing more properties.

Thanks in advance!
 
Hi,

Just wanted to get some thoughts on the following situation my partner and I are in:

Purchased 1st home (sydney, nsw, now becoming IP) in 2010 415K, interest only loan
Loan Currently 332K

Wanting to purchase second home (also in sydney, nsw) soon, valued at around 500K - unsure whether to go for IO or Principal / Interest on this one as we may or may not move on from this property as we are doing with the first one.


IO IO IO.

PI simply gives u less options in the longer term.

BTW I meant IO for both, have a 100 offset account on the new PPOR split

Not enough savings to cover deposit + LMI + stamp duty + legals for 2nd property purchase, so mortgage broker has suggested cross collaterized option.

I.e. Total value of 2 properties will be roughly 915K, loans will be roughly 832K, total LVR 91% or so.

Might I suggest you have a broker that either likes it simple, and doesnt mind costing u extra money and more risk, OR, they dont know any better. You choose which is worse :)

For a start the LMI premium would be higher with the deal crossed.

Is this a good idea - it seems the only option right now as we can't afford the costs any other way?

Of course

take your existing place, refi to 90 ish

base loan of 332
new loan of 41.5

Buy new place

92ish % lend
458 loan



I guess u have some savings from ur post which u will put toward the deal

Certainly is tight, but crossing isnt the soln..........


You would hope the current place u have i worth mre than 415 now ? as well ?

ta
rolf
 
Yes rolf has given you good advice here. Keep them separate and you save on LMI. Cross collateralising the 2 is just easier for the broker/bank - but not the best situation for you unless you are extremely desperate.
 
IO IO IO.

PI simply gives u less options in the longer term.

BTW I meant IO for both, have a 100 offset account on the new PPOR split



Might I suggest you have a broker that either likes it simple, and doesnt mind costing u extra money and more risk, OR, they dont know any better. You choose which is worse :)

For a start the LMI premium would be higher with the deal crossed.



Of course

take your existing place, refi to 90 ish

base loan of 332
new loan of 41.5

Buy new place

92ish % lend
458 loan



I guess u have some savings from ur post which u will put toward the deal

Certainly is tight, but crossing isnt the soln..........


You would hope the current place u have i worth mre than 415 now ? as well ?

ta
rolf

Take advise from Rolf, to me it seems he knows what he's talking about.
I had similar situation when advising my sister, as her broker just wanted to secure the loan by x-coll.
Most brokers are not there to guide you on your structure so do your research, plan out your structure, and inform the broker how you wish to structure it.
 
Thanks for the replies!

Rolf, with refinancing the current property (415k) to 90% to free up the 41.5K for deposit on new property, could the broker organise this for us?

Does this have to be done (refinancing) with the current lender on the property or could it be with any lender?

And does the 41.5k for deposit on the new property get released by the same lender as well?

Sorry, I'm just confused on who can lend the cash, whether it has to be the existing lender or not?

So does this mean we end up with 3 loans:

1 for 332k
1 for 41.5k
1 for 458k or so?

We have about 40K savings for costs + stamp duty, LMI etc.

And could the lender on the new property be anyone, not the same as on property 1?

Thanks for the advice on IO vs P&I, IO does seem best for both. What did you mean by split with the offset account?

Interesting to hear LMI would be higher with crossed, I didn't know that, thanks!
 
Thanks for the replies!

Rolf, with refinancing the current property (415k) to 90% to free up the 41.5K for deposit on new property, could the broker organise this for us?

Does this have to be done (refinancing) with the current lender on the property or could it be with any lender?

And does the 41.5k for deposit on the new property get released by the same lender as well?

Sorry, I'm just confused on who can lend the cash, whether it has to be the existing lender or not?

So does this mean we end up with 3 loans:

1 for 332k
1 for 41.5k
1 for 458k or so?

We have about 40K savings for costs + stamp duty, LMI etc.

And could the lender on the new property be anyone, not the same as on property 1?

Thanks for the advice on IO vs P&I, IO does seem best for both. What did you mean by split with the offset account?

Interesting to hear LMI would be higher with crossed, I didn't know that, thanks!


Hi GW

Your broker can possibly do the 90 % "refinance". this will depend on a few things, such as is the broker accredited with ur lender, will that lender deal with brokers in any case etc,

One advantage of trying to do with the same fund is I suspect you've already paid lenders mortgage insurance for the base loan. What that means is the 41K or so separate loan that you will be taking out, will only cost a little bit in mortgage insurance, rather than reinsurer and a whole lot including the 332k.

Many brokers don't like this method, because you only get upfront commission on the 40,000 (usually) say approximately $250, and therefore will look toward refinancing the whole facility across to a new lender, therefore making the whole new loan the commissionable. Sometimes there are good reasons removing the whole across to new lender, such as the lender won't do what you need to do due to policy issues, or that lender's valuation is coming short etc.

the 332K loan and the 40 K loan need to be with the same lender, otherwise you end up in a second mortgage situation which is close to impossible.

so in short know it does not need to be the existing lender, but often this is of benefit to you.

yes you will end up with three loans, the 332 in the 41 secured against your current house, and the approximately 458 K secured against the new house.

In general the lender for the second place could be someone else other than your current lender, or the lender you may refinance your current place to, a lot will come down to what product mix works you, and the lenders rules and credit policy around you, and the property you're looking to buy.

you might be lucky, correctly structured you might save several thousand dollars on lenders mortgage insurance, but then you might not.

We no little of your overall circumstances you serviceability, your risk profile your future goals, et cetera so it is really really hard to comment in a very specific fashion. Because what is great for one person could be really bad for another

On that basis I suggest you go and get some specific credit advice to specific to your circumstances.

Who is your current lender?

Thanks

Rolf
 
Rolf, with refinancing the current property (415k) to 90% to free up the 41.5K for deposit on new property, could the broker organise this for us?

by the sounds of it its not if he can do it but is he capable of doing it and knows why and how to set everything else up?

sounds like its time to get a decent broker
 
Hmm thanks for the replies again.

Rolf, here's a little more info on our situation which may help:

We paid a 20% deposit on the first property, so no LMI.

It's an IO loan and we haven't paid any further off it.

Does this mean we would pay some LMI to free up the 40K loan on the first property to use as a deposit for the second property, as well as some LMI to secure the roughly 92% loan on property #2?
 
Hmm thanks for the replies again.

Rolf, here's a little more info on our situation which may help:

We paid a 20% deposit on the first property, so no LMI.

It's an IO loan and we haven't paid any further off it.

Does this mean we would pay some LMI to free up the 40K loan on the first property to use as a deposit for the second property, as well as some LMI to secure the roughly 92% loan on property #2?

Full LMI on the first loan to access the 40 k, and that will be say very approx a % of the total loan exposure, $ 7000.

Full LMI on the new PPOR loan, of say 10 000 or so.

Before u say wow, the 832 combined exposue if crossed would be approx 27 k and unless u are a very strong client, would have a snowballs chance of getting up anways.

In hindsight, if you were my client, I would have pushed for an answer, on what you were doing with the property long term...............

You would then have ended up with an option and a nudge to got a 90 % lend option at that time.

1. It would mean you would have a 373 tax ded loan, instead of 332
2. You would have a LMI premium paid thats largely depreciable
3. You would have 40 k cash to go toward you current purchase meaning you would need to only get ONE loan application trough
4. You would have only ONE credit file hit instead

Of course, 20/20 hindsight is always wonderful............and what ifs dont usually work.

Still, worth mentioning for others that are looking at this thread in the future.

While we are here to provide guidance to you, the real value in threads like this is the longer term education of others that will com here over the years.

So thanks for providing such a good model to work with :)

ta
rolf
 
Thanks for the last comment Rolf! Just a quick question about the new 40k loan on the first property, would the interest on that be tax deductible as well as the 332k loan or only the 332k loan?
 
Thanks for the last comment Rolf! Just a quick question about the new 40k loan on the first property, would the interest on that be tax deductible as well as the 332k loan or only the 332k loan?

If the $40k is to be used for investment purposes, it's tax deductable. If it's going to be used as a deposit for your own home, it's not.

If your broker suggests cross-collateralisation, get a new broker. Your situation is not that complex.
 
If the $40k is to be used for investment purposes, it's tax deductable. If it's going to be used as a deposit for your own home, it's not.

which is exactly why you need to separate it GW. the remnant debt is tax-deductible or will be tax deductible because you will turn a property to invest in property.

The 40 will be used to your home and so therefore needs to be separate, otherwise you will end up with a accounting mess

Thanks

Rolf
 
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