Finance Structure Help

Just need to pick the brains of a few experts on an issue I have

At the moment I have the following:

Unit 1 (currently residing) Value $600 Mort $340
Unit 2 (investment) Value $135 Mort $135
Saving available $65k

I now want to buy a house for $550 for my expanding family without selling Unit 1 as I think it has good long term prospects. When it is rented out it is about $150 per month CF +
Unit 2 is close to CF+
I used equity in Unit 1 to buy unit 2 which is why the mort is so high.

So as far as my deposit goes:
*Should I use the equity available from Unit 1 (approx $113k as I need to keep LVR under 80% across the portfolio).

PROS

-This would save me over $18k in LMI.
-More cash retained

CONS

-This would also make my new PPOR securitised against another property. This is something I have been warned to be cautious of.
-It also reduces equity if I want to buy another IP.
-It means I have a bigger mort as I am not using any cash

OR

*Should I use only the available cash as a deposit

PROS
-No securitisation between PPOR & IPs
-Lower mortgage as I have put in more of my own cash
-Leaves more equity available from Unit 1 for future IP purchases

CONS
-Mortgage goes up by $20k to cover LMI.
-Less cash retained

I am also keen to hear other structures that could be used any theoretical errors I am making.

I have made sure there is a buffer of $10k left over for any problems (property or other).

So what do you guys think? I am going to see an accountant anyway but would be keen to hear peoples thoughts on the scenario.

Thx
Nick
 
Hi Nick,

Using your equity will get you there quicker, but as you say, it means you won't have that equity for another IP later on.

The LMI saving is nothing to sneeze at either. LMI can help you get ahead faster, but you wouldn't want to pay it if you don't have to.

If you do decide to use your equity, take the opportunity to restructure your loans properly. They're currently cross collateralised but they don't need to be. There's also no need to cross collateralise your new purchase or any subsequent IPs. You simply need to structure your lending better by drawing the equity as cash, rather than crossing everything.

Generally speaking, an accountant isn't qualified to properly advise you on lending issues, they're there to advise on tax. If you're looking for lending and structuring advice, talk to one of the brokers from the forum, we're all well versed in proper structuring.
 
Hey Nick,

I'd go with the option of using your equity. The LMI saving is substantial and you have enough equity to play with. You can then use your cash for future investment purchases.

By your post, it seems as though you're unaware that your loans appear to be crossed already. Given that you've borrowed 100% for Unit 2, it looks as though the lender has taken Unit 1 as security. A better loan structure would have been to take out a separate loan to draw out the equity in Unit 1, and then use it to fund Unit 2. I.e. keeping the two securities separate and independent of each other.

As Peter suggested, its a good idea to uncross your loans now. In your case, there's a pretty simple fix at this point in time. If the market flips however, it may be harder to do so.

The reason why most credit experts will advise against crossing is that it generally benefits the bank by giving them more control over your portfolio. Crossing potentially makes it harder for you to refinance, can create issues when drawing out equity and reduces your flexibility to sell.

An accountant may be useful in providing advice on the tax deductibility of those loans, but to correctly structure your finances, you'll need good credit advice.
 
I'd go with the using equity option and keep the cash as a contingency buffer.

I'd also fix up that cross coll at the same time as setting up the new equity release.

Cheers

Jame
 
Hi Guys,

Thanks so much for your responses. It has given me alot to think about.

Some of the points I would like to ask a little more:

- Drawing out equity as cash - so the theory is that the equity that gets pulled out becomes seperate from the property that it has come from. It then is used as collateral. This means that there is no link between Unit 1 and any other property even though the equity being used originally came from Unit 1. I guess then that my loan in unit 1 will go up by whatever I pull out as equity. This will impact cash flow for unit 1 which I will need to consider. Does that sound right?
-How do I go about unlocking this equity and uncrossing? I would like to do so before buying a house as it might be harder from that point. As you say, if the market turns the corssing of properties could cause an issue.
-I am aware the loans are crossed. At the time of purchase I was only aware that I could use equity or cash. I wanted to keep the cash for the house I am going to buy. So I just used equity and they became crossed. Based on the above I now realise you can use equity but draw it out to keep it separate.
 
- Drawing out equity as cash - so the theory is that the equity that gets pulled out becomes seperate from the property that it has come from. It then is used as collateral. This means that there is no link between Unit 1 and any other property even though the equity being used originally came from Unit 1. I guess then that my loan in unit 1 will go up by whatever I pull out as equity. This will impact cash flow for unit 1 which I will need to consider. Does that sound right?
You're borrowing the same amount of money overall, regardless of which property the money is secured against. From a big picture perspective your total cash flow should not be any difference assuming the interest rates are the same across all loans.

-How do I go about unlocking this equity and uncrossing? I would like to do so before buying a house as it might be harder from that point. As you say, if the market turns the corssing of properties could cause an issue.
You need to refinance the properties involved. This can be done within the same lender if appropriate, which would minimize costs. The best approach will depend on the circumstances. Get a good broker to help, but make sure they justify their recommendations so they don't refinance to another lender simply to earn more commissions.

-I am aware the loans are crossed. At the time of purchase I was only aware that I could use equity or cash. I wanted to keep the cash for the house I am going to buy. So I just used equity and they became crossed. Based on the above I now realise you can use equity but draw it out to keep it separate.
Cross collateralisation isn't a problem until one day it does become a problem. At that point it can stop your investment strategy in its tracks and be very hard to recover from. It's far easier, quicker and cheaper to do something about it early, rather than allow things to become more tangled and messy by adding other properties to the mix.

As a general rule it's better to use equity rather than cash simply because it creates more opportunities for tax deductions. You can still put your cash to good use via offset accounts and (in some circumstances) redraw facilities.
 
You're borrowing the same amount of money overall, regardless of which property the money is secured against. From a big picture perspective your total cash flow should not be any difference assuming the interest rates are the same across all loans.

You need to refinance the properties involved. This can be done within the same lender if appropriate, which would minimize costs. The best approach will depend on the circumstances. Get a good broker to help, but make sure they justify their recommendations so they don't refinance to another lender simply to earn more commissions.


Cross collateralisation isn't a problem until one day it does become a problem. At that point it can stop your investment strategy in its tracks and be very hard to recover from. It's far easier, quicker and cheaper to do something about it early, rather than allow things to become more tangled and messy by adding other properties to the mix.

As a general rule it's better to use equity rather than cash simply because it creates more opportunities for tax deductions. You can still put your cash to good use via offset accounts and (in some circumstances) redraw facilities.

So what you are saying is that if I take out $100k from Unit 1 (in the form of cash rather than collateral equity) then my mort on that property will go up by $100k but the mortgage on the home that I buy will decrease by this amount. However there will be no technical link at this point between Unit 1 & new PPOR.
 
So what you are saying is that if I take out $100k from Unit 1 (in the form of cash rather than collateral equity) then my mort on that property will go up by $100k but the mortgage on the home that I buy will decrease by this amount. However there will be no technical link at this point between Unit 1 & new PPOR.

That's pretty much it. You can fully fund a new purchase in 2 ways:
Crossing: 105% loan using new purchase and other property as security.
Structuring: 25% equity loan (deposit & costs) against other property, 80% loan against new property.

Either way you still borrow the same amount.

How the equity loan is structured will depend a little on the specific circumstances. It might be a separate facility or it might be an increase on an existing loan.
 
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