Trying to un-cross x-coll IPs

[SupaRex]

Hello my fellow somersofters

I need some help clearing up my understanding.

When I was a young naive investor, I simply bought a property, waited for the equity to build up, then used the equity as security to purchase my next IP.

The NAB (who I have all my loans with) were more than happy to loan me money and secure all my IPs together.

Anyway, I now have four IPs, all securing each other. All of my loans are fixed bar one which I have an offset account linked.

There are actually two parts to my question here:

My plan to un-cross them all is to just wait until they get enough equity in themselves to secure each loan individually. Will this work? Is there a better way? Is there something really obvious I'm overlooking (most likely)?

The second part of my question relates to fixed vs variable loans. One of my big problems seems to be the "break" costs relating to my fixed loans. Do variable loans not suffer the same problem and/or work in the same way? If they don't, then why am I offered say a "three year variable rate loan" (sorry of some of that terminology is wrong)? If you can simply break a variable loan cost free, then why have it for say a three year period?

I'm sure the problem is my understanding of things, but that's why were are all here right! - to learn an help each other

 

[Peter_Tersteeg]

Perhaps your 3 year variable rate loan indicates a 3 year interest only term or a 3 year review term? It might also indicate it's fixed for 3 years then reverts to variable (the likely explaination).

In your position I'd be waiting until the fixed term expires before moving. As each fixed loan expires you'll need to refinance the property to a different lender as cross-collateralisation is quite standard for the NAB.

This also implies that you've got enough equity in the property you're moving, as well as sufficient equity in the properties you're leaving with the NAB to meet the LVR criteria for both lenders.

Removing the x-coll is going to be a little tricky and painful with 4 properties, but it's a lot easier to do it soon as with more properties the difficulty factor only increases to the point where it becomes impossible.

 

[SupaRex]

Thanks Peter,

Yes, I do make a few assumptions about equity, but I guess I was trying to illustrate a point mainly. I agree wholeheartedly about it being tricky to uncross now, but even harder later on. I do intend on letting all my loans that are fixed 'expire' and go variable.

Cheers.

 

[Aaron_C]

Hi SupaRex,

Peter has said it quite succinctly. The break fees can be quite onerous - the basic formula to work out the break costs is = ( Fixed Rate - Wholesale Rate ) x years left x loan amount. The wholesale rate is way below their standard variable rate and at this stage is probably something like 4.50% approximately.

Best to uncross the properties once your fixed terms all expire as I've rarely seen a deal where the benefits outweigh a substantial break fee. Do it one at a time if the LVR is below 80%.

 

[chindonly]

Hi Aaron,

What about breaking a X-Coll where they are all on variable (3 properties).

As there is no fixed rate loss to the bank, as long as I have the LVR over 80%, shouldn't be a problem?

Was also thinking of fixing 1 or 2 now, seeing the 50pt reduction by the RBA today.

 

[Aaron_C]

Hi Aaron,

What about breaking a X-Coll where they are all on variable (3 properties).

As there is no fixed rate loss to the bank, as long as I have the LVR over 80%, shouldn't be a problem?

Was also thinking of fixing 1 or 2 now, seeing the 50pt reduction by the RBA today.

Breaking an x-coll when the loans are all variable incurs no substantial break fees. Shouldn't be a problem but you may have to submit another application.

 

[SupaRex]

Hi Aaron,

What about breaking a X-Coll where they are all on variable (3 properties).

As there is no fixed rate loss to the bank, as long as I have the LVR over 80%, shouldn't be a problem?

This is what I was wondering (but said better/clearer than I could).

Thanks for your replies Aaron.

 

[chindonly]

Thanks Aaron!

 

[Marty McDonald]

Hang on....trying to get Nab to let you discharge a property that is security for all their other loans is going to get messy and they may try to roadblock you. I would wait until all are variable rates and either refi all to a new lender, set up as stand alone deals or possibly split between two lenders. Sorry nab but it has to be this way so you don't have control.

The 3 year deal you refer to is a variable rate with a slight honeymoon. May be an exit fee on that one.

 

[Rolf Latham]

Hang on....trying to get Nab to let you discharge a property that is security for all their other loans is going to get messy and they may try to roadblock you..

Really..........they would never do that surely

Number one retention trick in the business.

ta
rolf

 

[boomtown]

Hi SupaRex,

Peter has said it quite succinctly. The break fees can be quite onerous - the basic formula to work out the break costs is = ( Fixed Rate - Wholesale Rate ) x years left x loan amount. The wholesale rate is way below their standard variable rate and at this stage is probably something like 4.50% approximately.

how can their wholesale rate be less than what they could get in a standard bank savings account? How can they justify that?

 

[Aaron_C]

how can their wholesale rate be less than what they could get in a standard bank savings account? How can they justify that?

They justify it because it's in the contract...that's the whole point of them fixing your rate.

 

[tobe]

The fixed rate break costs are tax deductable, that and the ongoing rate savings switching to a cheaper fixed or variable rate may more than offset the break costs.

I agree with marty, picking them off one by one sounds good in theory, but is dificult in practice, especially with NAB. The discharge team at NAB make you even out the LVR's on the remaining properties, and ask you to confirm income etc, which can wreck your plans. The cleanest way to proceed is to arrange simultanous discharge on the whole lot to one or two seperate new lenders.

While refinancing the lot to one new lender sounds self defeating, the idea is the new lender has a less restrictive policy than NAB, and it is possible to unpick to seperate lenders after that.