Restructuring Loans to Avoid Cross Collatorisation

[justlearning]

Okay, so we're going to try and restructure our loans ourselves (I know, many will recommend a broker, but that's not the path we're going to take if we can avoid it).

We've been given the nod from Westpac to be able to restructure all of our loans to uncross them.

We're going to propose that each loan that has equity above 80% (4 properties) be setup with a LOC with the excess funds. (the bank proposed one consolidated LOC, but I understand it is more flexible to have a separate LOC for each property).

We have two properties with negative equity. We propose to draw down cash from the LOCs to pay down those loans to 80% LVR. One of the LOCs we'll draw from will be our PPOR.

The PPOR currently has a LOC which has been used to purchase shares...so that single line of credit will be used for shares as well as paying down a loan on another property as described above.

Can anyone see any pitfalls to this structure or any tax implications? Note all withdrawals from the LOCs will be for investment purposes (shares or property purchases).

thanks
JL

 

[Terry_w]

Okay, so we're going to try and restructure our loans ourselves (I know, many will recommend a broker, but that's not the path we're going to take if we can avoid it).

We've been given the nod from Westpac to be able to restructure all of our loans to uncross them.

We're going to propose that each loan that has equity above 80% (4 properties) be setup with a LOC with the excess funds. (the bank proposed one consolidated LOC, but I understand it is more flexible to have a separate LOC for each property).

We have two properties with negative equity. We propose to draw down cash from the LOCs to pay down those loans to 80% LVR. One of the LOCs we'll draw from will be our PPOR.

The PPOR currently has a LOC which has been used to purchase shares...so that single line of credit will be used for shares as well as paying down a loan on another property as described above.

Can anyone see any pitfalls to this structure or any tax implications? Note all withdrawals from the LOCs will be for investment purposes (shares or property purchases).

thanks
JL

One big LOC would have resulted in cross collateratising the loans so lucky you picked that up.

Keep all existing loans at same amounts and set up extra loans for any additional amounts you need to 'pay down' to keep LVR at 80%.

eg. share LOC should be set up as a separate loan for the amount used - don't combine it with other loans. Change this to an IO Rocket repay loan.

Any new loans to access equity should ideally be LOCs but all the rest should be standard IO loans. Offset on the non deductible portion.

 

[Colin Rice]

Have you had the properties revalued recently ?

l would also consider not having all your properties with one bank especially if they tied you up in the first place!

Have you had a bad experience with a previous broker?

 

[jonmardell]

You are on the right track but for a line of credit structure i would keep each purpose as a separate line of credit. For instance if you owe 500K on a 500K valued property you would reduce the loan against that property to 400K and have a second LOC against your PPR for 100K. I assume you had the valuations done already, were you happy with them? If you think some of them came in a little low it might be worthwhile getting some other banks to do valuations.

Okay, so we're going to try and restructure our loans ourselves (I know, many will recommend a broker, but that's not the path we're going to take if we can avoid it).

We've been given the nod from Westpac to be able to restructure all of our loans to uncross them.

We're going to propose that each loan that has equity above 80% (4 properties) be setup with a LOC with the excess funds. (the bank proposed one consolidated LOC, but I understand it is more flexible to have a separate LOC for each property).

We have two properties with negative equity. We propose to draw down cash from the LOCs to pay down those loans to 80% LVR. One of the LOCs we'll draw from will be our PPOR.

The PPOR currently has a LOC which has been used to purchase shares...so that single line of credit will be used for shares as well as paying down a loan on another property as described above.

Can anyone see any pitfalls to this structure or any tax implications? Note all withdrawals from the LOCs will be for investment purposes (shares or property purchases).

thanks
JL

 

[justlearning]

Thanks heaps for the advice.

Why should I keep seperate locs for different purposes. I thought it would be more powerful to have a single large loc against the ppor so we can access as much money as needed for any investment purchase without first having to speak to the bank.

Ie. If we want to purchase shares at short notice we could access funds without having to increase a dedicated 'shares' loc.

 

[Terry_w]

Thanks heaps for the advice.

Why should I keep seperate locs for different purposes. I thought it would be more powerful to have a single large loc against the ppor so we can access as much money as needed for any investment purchase without first having to speak to the bank.

Ie. If we want to purchase shares at short notice we could access funds without having to increase a dedicated 'shares' loc.

You could have one large LOC (up to the level of not cross collateralising)

There is no real need to segregate LOC loans where the whole of the money borrowed is used fo investment purposes - unless the investment may be purchased in different names.

 

[Aaron_C]

I just don't get why banks cross people's securities, then convince them that they are working in their best interests when the customer requests for it to be uncrossed. Why cross in the first place?

 

[Singo]

I just don't get why banks cross people's securities, then convince them that they are working in their best interests when the customer requests for it to be uncrossed. Why cross in the first place?

I reckon it is easy for them to approve loans if all are linked together. (Enough security, no need to order full valuations..) If loans are linked together it harder to move banks as well, isn't it?

 

[Aaron_C]

I reckon it is easy for them to approve loans if all are linked together. (Enough security, no need to order full valuations..) If loans are linked together it harder to move banks as well, isn't it?

Yes I know that's the reason (stitch the customer up) but to turn around later when the customer wants to uncross them and saying 'sure thing, we will still look after you' is a bit disingenuous.

 

[Peter_Tersteeg]

I just don't get why banks cross people's securities, then convince them that they are working in their best interests when the customer requests for it to be uncrossed. Why cross in the first place?

Because whilst the loans are crossed, the borrower can't go anywhere else. They take the path of least resistance and remain loyal to the bank.

The first day of my CBA training, we were told to set people up with a mortgage, transaction account and a credit card. Statistically speaking, with 3 active products in one lender, people are unlikely to refinance and move because it becomes too difficult. From a lenders point of view cross collateralisation only adds more weight to this argument.

 

[Singo]

Yes I know that's the reason (stitch the customer up) but to turn around later when the customer wants to uncross them and saying 'sure thing, we will still look after you' is a bit disingenuous.

I was on my mobile and didn't notice to whom i was replying This is exactly what the bank is doing to us right now. Hopefully we will get stand alone loans soon.

 

[Rolf Latham]

I thought it would be more powerful to have a single large loc against the ppor

Please read your future loan offer and memo of mortgage carefully.

Many many lenders have

"repayable on demand" clauses, and quite a few have regular reviews - some even annually.

A LOC should not be used as a core loan product for those and a few other reasons.


ta
rolf

 

[Colin Rice]

I just don't get why banks cross people's securities, then convince them that they are working in their best interests when the customer requests for it to be uncrossed. Why cross in the first place?

Control of assets. The major goal of a bank.

 

[justlearning]

Now I'm starting to understand why a good broker can be helpful!

1) Colin, yes, we have had bad experiences with brokers in the past. Firstly because of poor structuring (the broker came recommended to us and I don't believe he looked after us) and secondly because of having a slow intermediatory between us and the bank (drives my partner crazy). One of the main reasons we're not using a broker is because I can't talk my partner into it!

2) Regarding revaluation. This was done about a year ago but I believe there has been some movement since (all in Perth). The bank indicated there would be a cost for revaluation, however, surely if we were to change banks they wouldn't charge us. I guess I could try and use that argument for a 'free' valuation. Although, it may not matter as I suspect our serviceability may be the limiting factor to how much equity we can release.

3) Regarding 'repayable on demand' clauses - thanks Rolf, that does sound scary. Would an alternative be to setup a series of Rocket Repay loans - does anyone know the conditions on those?

4) Regarding a joint Shares/Property LOC. Is there ever a danger that legislation could change so that deductions from property is treated differently to deductions for shares (aren't there always rumours of changes to property negative gearing)?

5) I hadn't really thought too much about whose name the properties are in. The PPOR is solely in my partners name. The two with negative equity are in joint names. Two with positive equity (just) are in joint names. And one with a large amount of equity is in my name. And we're also about to demolish our PPOR and build a new one, thus our personal mortgage will dramatically increase.

6) Now this is where forums get dangerous...makes me think about new things! We're currently paying all outgoings for the properties by cc (accumulating ff points) and paying off in full from our savings each month (which offset the PPOR mortgage). But the aim should really be to reduce our personal debt as soon as we can. So I think we should change this arrangement so all outgoings (rates, water etc.) are paid from an investment LOC (or similar loan). This would allow us to pump all of our cash into the home loan, reducing 'personal' debt and increasing 'investment' debt. Effectively transferring non-deductable debt to deductable debt. But then of course we miss out on accumulating ff points. However, thanks to the www and Terryw http://www.propertyinvesting.com/forums/getting-technical/finance/4335405 it appears you may actually be able to have a cc used for paying property investment outgoings and pay that off with a LOC each month. I think I'm now really scaring my partner (and I'm usually the conservative one).

7) Now, just to look up the rules on paying investment loan repayments from a LOC!

 

[Terry_w]

5) I hadn't really thought too much about whose name the properties are in. The PPOR is solely in my partners name. The two with negative equity are in joint names. Two with positive equity (just) are in joint names. And one with a large amount of equity is in my name. And we're also about to demolish our PPOR and build a new one, thus our personal mortgage will dramatically increase.

This is a very serious thing to consider. what if:

1. He mortgages the house without your knowledge (has happened)

2. Goes bankrupt (happpens all the time)

3. Dies and he leaves the house to the rspa (has this happened? probably)

4. Dies and his will is challenged

5. You die - this house won't fall into your estate! He then remarries and leave it to his new spouse and suddenly dies, leaving your kids nothing.

etc

 

[alexlee]

Okay, so we're going to try and restructure our loans ourselves (I know, many will recommend a broker, but that's not the path we're going to take if we can avoid it).

Not using a broker is fine if you yourself understand all the quirks and implications. Based on your posts, you don't.

 

[Terry_w]

Not using a broker is fine if you yourself understand all the quirks and implications. Based on your posts, you don't.

No beating around the bush Alex!!!

 

[alexlee]

Beating around the bush is fine if you expect to be able to guide the person to coming up with the right answers, or at least the right questions, on their own.

Without a certain level of knowledge, they'll never get to the right questions, or separate the significant scenarios from the alien invasion scenarios.

 

[Aaron_C]

we have had bad experiences with brokers in the past. Firstly because of poor structuring (the broker came recommended to us and I don't believe he looked after us) and secondly because of having a slow intermediatory between us and the bank (drives my partner crazy). One of the main reasons we're not using a broker is because I can't talk my partner into it!

Well some people just don't trust others and that's the way it is. Sorry you had a bad experience before but it is true that many brokers aren't any good at their job.

 

[justlearning]

Well now I'm reading about 'debt recycling'. I hadn't even heard about it until today, but it sounds like something that might be of benefit for our situation. Starting to feel like I'm getting in way over my head!

Seems to me like I need to see not only a mortgage broker but a financial planner, an accountant and a lawyer (we're very, very naughty and haven't done a will yet!).

So if I do approach an 'expert'...who do I start with and how the hell do I choose one? I see there's a bunch of experienced people on Somersoft, but if possible I'd like to deal with someone face to face (Perth).