Looking for another IP but.............

From: John P

Hi guys, I am looking for another IP but now that I feel I have a bit more experience, i am making the extra effort to ensure that my finances are structured in such a way that my money is working as hard as it can.

Here are my 2 options as I see them:
Option 1
Put previous P's down as security in order to have cashless deposit is no problem - I've got plenty of equity. What I don't like about this option however is that it will be encumbered. I don't like this idea because obviously, in the worst case scenario (Which is highly unlikely) bank could foreclose on one or more IP's. The advantage is that it means I don't have to dip into my line of credit.

Option 2: Access my LOC for deposit and legals and therefore avoiding having to use previous IP's as security. My reasoning here is that if, again, the worst case scenario comes along, the bank cannot touch the previous IP's. Now, to a chuck a spanner in the works, a lender from a well known institution told me that :"even if you do this the banks can still get you"!!!

So my question is, in the 2nd scenario, how much harder would it be for the banks to "get you"???

Looking forward to your responses

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Reply: 1
From: Gail H

If you owe the bank a debt which it can't satisfy by cashing in the assets that it is secured against, then it can still claim against other assets, unless they are in someone else's name. The general principle is that any creditor can claim against any of your assets (save for the assets that you are allowed to keep to maintain yourself).

The problem for the bank is that it just lines up behind the other creditors and is not guaranteed any money. This is why the bank will prefer to secure the debt against a property as collateral. But make no mistake, a debt can potentially be executed against any of the debtor's assets.

Of course, you should check this advice with a professional and not rely on what I say.

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Reply: 2
From: Rolf Latham

Hi Jp

Option 1 is a good example of cross collateralisation.

Option 2 is a good example of self supporting securities

The second is by nature a little more hassle but provides greater flexibility, and in the unlikley case of financial drama gives you more time to get on your feet, if they are not with the same lender.


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Reply: 3
From: Geoff Whitfield

I've just gone option 2 because it cuts down (significantly) on mortgage insurance.

On our house plus property 1, we had looked at buying another property 9 months ago, to get 90% borrowing against the 2 to buy the third property. At 90%, MI was significant- maybe $10,000- because it was based on the combined value of the 3 cross-collateralised properties. The deal fell through for other reasons- very much to my regret.

Now the house + IP1 have appreciated $20K each. I've used the extra to draw down, and use as a deposit on a new property- to borrow 90%. Borrowing on the first 2 is still 80%- so MI is only applicable on one property, not three.

And by borrowing 89.8% instead of 90%, MI reduced from $3,100 to $2,600.
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