How to un-do cross collateralization

I've been a user of these forums in the past and found them very useful, so I am hoping someone can provide some words of wisdom on our situation before we approach the bank.

Some background:

PPOR LVR around 50%
IP1 LVR over 100%
IP2 LVR around 50%

My husband and I are looking to sell our PPOR this year to upgrade to a bigger home (and more expensive mortgage)...

When we bought our PPOR, we x-coll IP1 and drew down some of the equity as a deposit for the PPOR..hence the very high LVR as the value of the property then decreased.

Now that we want to sell, we are unsure if the best thing to do would be approach the bank (ANZ) and ask them to x-coll since we have a low LVR for our PPOR. We would be willing to transfer some funds on to IP1 mortgage to reduce the LVR if this may be a concern for the bank. We just don't want to find ourselves being forced to pay down IP1 with the profits of our PPOR sale, as we want to use this for our new PPOR...hence why we want to untangle ourselves beforehand.

IP2 is also with ANZ however, this mortgage was with a different lender and we brought it across a couple of years after PPOR and IP1.

The main question is- could there be barriers to us un x-coll the two mortgages? Would ANZ come to the party easily, or would we need to perhaps consider refinancing? We really want to resolve this matter in the early half of this year and start looking for a new home in the second half.

All mortgages are variable interest rates..our PPOR/IP1 mortgages will have been with ANZ 5 years in June.
 
There could be some issues.

First thing to do would be to contact your broker and get an ANZ val done on the IP. If under 80% no worries, if over then you may have to use cash to pay down the loan - which will mean you have less cash for the new PPOR.

A possible way around this is to borrow from a related party, draw up a commercial loan agreement and then later refinance this loan with ANZ (or other lender - into the main IP loan) once the overall LVR is under 80%.

You will need to apply for a 'release of security' to remove the mortgage on the PPOR.
 
It's not difficult to remove cross-coll from where you are. It appears you've got plenty of equity and when structured properly, ANZ are reasonable amenable to sorting this out.

If you sell your PPOR without sorting it out first, ANZ will simply have your IPs revalued, and then cross the two IPs together to maintain their security position (odds are they're already crossed anyway). If the valuations determine that there isn't enough equity, they'll use money from the PPOR to reduce the debt over the IPs.

This sort of scenario is probably the most common outcome of cross collateralisation. It's especially troublesome when the IP valuations are low and you have to use your cash to reduce debt.

You probably don't have to remove the x-coll at this point, but it beneficial in the long run to do it, especially if you're planning on further investment after you move into your new home.
 
Thank you very much for the replies and advice, really appreciate it!

Is there a general rule of thumb of how much ANZ would want the IP1 LVR to be? So how much would they likely take from the sale of the PPOR?

These are questions we will of course ask them directly before we make any moves to sell, but would be curious if anyone has a rough idea so we can predict how much of the PPOR sale profit we will have left for our new PPOR purchase.
 
ANZ will want the LVR to be 80% or lower.

You can go up to 90%, but that would be a full application and paperwork. ANZs default position would be 80% and they'll use cash from your sale to reduce the remaining debt if necessary.
 
If IP2 isn't x-coll, you could look at getting a new equity split in IP2's loan to bring IP1 down to 80% (assuming the valuations allow it.) There will be tax implications, but from what I understand the new loan split should be fully deductible - have a chat with your tax guy/girl to confirm. :)

You should then be able to get PPOR released without having to use the equity/ proceeds of sale of your PPOR, and can avoid having any properties x-coll.

It's a bit more mucking about but the end result is better if you plan to invest further down the track, and leaves you with more cash to put toward your next home, rather than using cash to pay down an IP.
 
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