Finance

[WebBoard]

From: Mike .


Security/collateral
From: Jim
Date: 22 Jan 2001
Time: 21:19:34

Hi folks. I hope someone can help me understand when banks ask for security when you buy a property. I have been having a debate (some would call this argument ) with my wife regarding this.

Pardon my ignorance on the way I say things below, but I'm fairly new to investing.

If say I have a home worth $200K and fully paid off, then this would be my equity. Right? What I would then be inclined to do is to start up a new loan of $160K (ie 80% of my equity). The security held against this loan would be my home. Correct?

I now decide to buy a property worth $300K, so one would think that a bank would lend you up to 80% (sometimes more, but let's stick to 80) which would be $240K. The remainder of the 20% ($60K) I would source from the new loan I have just started, leaving me with a balance of $100K. I can then continue to buy properties in the same fashion sourcing my deposits from the loan I originally opened from my equity.

My question is, would the bank hold security against my existing home on these properties I purchased? Up to what percentage would a bank lend you without them requiring any security?

My wife and I have been talking to a few lenders this week, and they have given my wife the impression that they always require security. I believe that you can buy a property without offering any security. I have heard that a bank, given the chance, would try and hold some sort of security if they could no matter how much they lend you. How should a smart investor handle situations like these when negotiating with banks?

Thanks for any responses.

Regards, Jim.

 

[WebBoard]

Mike

Reply: 1
From: Mike .


Re: Security/collateral
From: Mike
Date: 22 Jan 2001
Time: 21:47:28

Hi Jim,

I'll let others more astute than myself answer your question. I just wanted to point out that if you're dealing with lenders directly, as I suspect you are, then you are doing it harder than is necessary. I have a mortgage broker come over to my place and, for the cost of a cup of coffee, I pick his brains with those sort of questions. Mortgage Brokers know a dozen or more lenders policies which can be a real help. If you're borderline with one bank's criteria you may be okay with another lender. Some of the good one's can even advise you on restructuring your finances. By all means, get advice from the Forum, but get yourself a Mortgage Broker. Since I've tried them I wouldn't leave home without them. Is that right?

Regards, Mike

 

[WebBoard]

Jim

Reply: 1.1
From: Mike .


Re: Security/collateral
From: Jim
Date: 22 Jan 2001
Time: 21:58:17

Thank Mike.

As it so happens, today my wife and I did go and see just one of those mortgage brokers. At first, my wife questioned whether or not it is a good idea to go with a mortgage broker and why we shouldn't go to a bank directly. My answer to her was just what you said. It allows us to better find a deal as they have better knowledge on lending policies from a variety of banks. We basically give the mortage broker what our needs are, and chances are he will find a lender/product to suit.

Cheers Jim.

 

[WebBoard]

Bob

Reply: 1.1.1
From: Mike .


Re: Security/collateral
From: Bob
Date: 23 Jan 2001
Time: 10:53:45

Jim,

In answer to your original question ( if the mortgage broker didn't answer it) the banks always require security. However, i suspect you are asking about cross collateralisation. In the scenario you set out the bank secures the original loan against your residence and the second loan against your IP. All the money is secured against a property, but (IMHO) you have flexibility with the money from your house. If you cross collateralise, instead of taking out that first loan, you get the bank to give you a single loan for the whole value of the IP and BOTH properties are security for it - the real drawback comes when you want to sell the IP or something. You then have to untangle the mortgages. You're also stuck with the one bank, which may or may not be such a good idea.

However, there was a discussion just a few days ago on the benefits or otherwise of this approach.