Selling part of the security.

[rickmick]

G'day All

I have one investment loan covering several properties. (I now know that this may not be such a good idea but that's another issue). All of the properties used as colateral for this loan are income producing except one which is a vacant block of land. The vacant land was used to bring the LVR down to avoid loan mortgage insurance. The value of the land covers approx 15% of the total loan value.
Can anyone give me an idea what sort of penalties the bank is likely to use if I sell the block? The loan was only restructured this way early this year and is fixed on a twelve month honeymoon type deal.
Would the whole loan have to be re-financed?
Would we just have to deposit some of the sale proceeds back into the loan to maintain the LVR?
Would we be restricted from doing anything until the twelve month period is up?
Is the bank likely to charge heaps of fees to do any of the above? ........yeah, that is a silly question.

Any ideas would be appreciated.

Cheers
Rick

 

[Rolf Latham]

Hi Rick

Much depends on the lender and yes expect to pay some early repayment fee if the set up is on a honeymoon deal. Some can be be minimal, yet others can be quite steep. 2.5 % of the original loan value is about the max.

You may be lucky. Whi is the lender ?

Ta

Rolf

 

[rickmick]

Thanks Rolf,

The loan is with Colonial/CBA. I will be speaking to them today.

I think the main problem will be that I will have needed the other property values to have increased by as much as the land value so the loan can stay as it is.

The trouble with that is the loan has only been going for 6 months.

Cheers
Rick

 

[paulzag]

Good luck Rick

Let us know how it went.

I hate cross-collateralising loans.
1) The bank gets too much security for the loan (as values rise)
2) they are costly and/or complicated to change.

Bankers get training on how to package the deal to their clients and promote cross-collateralising. I suspect some actuary has worked out that banks lose less when one of these goes sour.

Paul Zag

 

[Rolf Latham]

HI PZ

Its not so much training, its drummed in.

GET maximum contribution!

Wind up time is much less when cross collateralised, but then again I suppose some of us know that already.

Ta

Rolf

 

[rickmick]

G'day and thanks for the responses.

This loan was set up through a finance broker. I went back to them to see what could be done and we think there will be enough increase in value on the other securities in the loan so we won't have to put any of the proceeds from the sale of the land back into the loan and still be able to maintain 80% LVR. Fingers crossed!

Having heard about the disadvantages of cross collateralised loans I don't know wether I would set one up again. At least I know the potential pitfalls now and can do all I can to avoid trouble. I think from here on in a trust structure may be the go.

You live and learn

Cheers
Rick

 

[rickmick]

G'day All

For Paul and anyone else interested.

The bank has released the land from the loan and my broker believes it will cost me $150 although I haven't heard from the bank yet.

This now gets me wondering about these cross collateralised loans. I know that everything regarding the property investment arena seems to be rosy at the moment, mainly because of capital growth, something we know doesn't continue but tends to move in a cyclic sort of trend.

Could this be a good loan structure strategy for the long term provided you hold some form of cash backup for the low growth times, movement in interest rates etc. ie, have several properties covered by the one loan which allows you to reduce bank charges and take advantage of the lower rates of interest on initial setup.

Once you get enough growth, get the lender to release one of the properties and use that equity to start the next group of purchases.

It just seems like a way of simplifying things when multiple properties are involved.

I've heard of people with 40 properties and I can imagine the challenge of trying to keep track of 40 different mortgages.

Just an idea! Think outside the square, all that sort of thing.

Cheers

Rick

 

[Rolf Latham]

Hi RM

Its all horses for courses. Small scale cross collateralisation can be a benefit sometimes, especially where pooling small loan values to maximise equity growth.

Im not anti cross coll at all costs, indeed have just done 3 deals in the last week using it, just its not a good long term strategy for most people just like holding property in your own name rather than some form of discretionary trust.

Man, if I had 40 mortgages I'd jump for joy hehhe

ta

Rolf

 

[rickmick]

Quick Update

Wednesday
Got call from broker, - bank has agreed to release the land from the loan - Good

Thursday
Letter from bank, - they will release the land ONLY if I make a payment off the loan principal of approx 10% on settlement. - Bad

Surprise Surprise, after discussing with the broker which properties should be valued to bring the LVR of the loan up to 80% without the land value included, the bank decided not to worry about it.

or

Is there just a communication problem ?

Gee, I'm glad the period before settlement wasn't too short !



Rick