Using equity without xcoll, how?

[piNoob]

Hello,

We are very close to do first step and buy our 1st IP, but there is one thing I simply can't understand

If one uses equity in existing PPOR as a deposit for the IP, how can you avoid xcoll? Isn't the whole point of equity is that bank is lending you money, but has right to your house in case you have a problem? In other words what is the point for bank to lend you money from your equity if it doesn't have rights to that equity??

Atm we are with ANZ bank on our PPOR. Mortgage broker suggested that we use proffesional package and do it this way ( you can have 5 loans under PP ):

1 loan - existing PPOR loan
2 loan - 25% of IP price ( 20% deposit and 5% all the legal costs etc )
3 loan - 80% of IP price

Does this setup mean it will not be xcoll? Or should there be any clause in mortgage contract?

I really want to understand this now, so I don't get any nasty surprises.

Please explain in simplest terms you can. Damn, I can develop computer software, but this.... this is just too much

 

[LynnH]

piNoob

The set-up outlined above does NOT have to be cross-collateralized. We have several loans which are set up in exactly the same manner (using Westpac Pro Package).

Loan 1 - normal home loan secured by existing PPOR
Loan 2 - LOC secured by PPOR, but used to fund deposit and costs on IP
Loan 3 - IP loan secured by IP.

(The above set-up assumes that the total borrowed for Loans 1 & 2 is 80% or less of the valuation of the PPOR, since many lenders will not lend above 80% LVR if a LOC is involved).

If you apply for the LOC before you purchase the IP, the bank can only use your PPOR to secure the LOC (since you don't have an IP yet for them to use as security). Then when you purchase your IP, insist that the IP is the only security used for the IP loan. Thus no x-coll!!!

Good luck!

Cheers
LynnH

 

[piNoob]

piNoob
The set-up outlined above does not have to be cross-collateralized. We have several loans which are set up in the same manner.

Thanks for your reply!

Is this possible to achieve same results but without using LOC, just normal loan?

Also you said "insist", but is this good enough? Shouldn't you specify some special clause in mortgage contract that there is no xcoll? I just wonder what do you need to put in words..

 

[LynnH]

piNoob

Yes, it is possible to achieve the same results using most types of loan. (I mentioned an LOC because we use that for convenience, as it fits best with our strategy).

When you sign the paperwork for your IP mortgage, the documentation will specify which property/properties the Bank will use to secure the loan (in our loan documentation, this information is on the front page). Just make sure that the IP is the only property mentioned!

Banks will try to get their paws on as much security as possible (and we have had this experience in the past). It is up to you whether you allow them to get away with this!! Remember, YOU are the customer - you can ALWAYS apply to another bank for your IP loan if your bank won't come to the party. I have told the bank that I'd go elsewhere for the IP loan if they insisted on cross collateralization, and this usually results in a grudging backdown by the bank.

Stick to your guns - banks are merely your investing partner: YOU are the one who decides your strategy. Good luck!

Cheers
LynnH

 

[Buzz]

PiNoob, Lynn is on the money ( or is that in the money?)

A line of credit is just one way to do this, it is convenient and flexible, acts like a big credit card ie you don't pay for what you don't draw down and can be interest only for 30 years. This compares to a standard loan with 5 years interest only that usually has to be all drawn down on the day of settlement ( you could put this directly into an offset so you dont pay any interest). Some banks charge more for a line of credit some don't - shop around. A LOC is one of many types of structures that could be used.

I have a diagram of how it works if you would like me to send it to you let me know.

Jane Slack-Smith

PLEASE note comments made should NOT be taken as specific taxation, financial, legal or investment advice. Please seek professional, specific advice.

 

[piNoob]

thanks mate, I think I finally got it

In other words, even if I use equity from my existing PPOR and literally borrow 105% ( as I won't use my money at all ) I still should be able to persuade bank that new loan should be only secured against IP I'm buying!

By the way, as I already have my loan pre approved, is it worth checking with bank/mortgage broker about this "no xcoll" condition up front? You know, if I sign contract, pay deposit, do building inspection etc. and then bank will say no, we don't agree with this "no xcoll" rubbish, it could be quite stressful (and perhaps costly ) to go hunting for another bank?

 

[Buzz]

Yep you are on track get it sorted before hand. You would have the loan ie LOC or other against your home going to full approval at the momen and the remaining investment loan at the preapproval stage if they were structured separately. You can change the structure at anytime before settlement usually for free - then ask if the preapproved loan is secured only by the investment property.

If you are not paying any mortgage insurance and you are not contributing 20% ( or with some lenders 15%) from the equity in your home then it is a safe bet that you are cross collaterised.

Jane

 

[LynnH]

You know, if I sign contract, pay deposit, do building inspection etc. and then bank will say no, we don't agree with this "no xcoll" rubbish, it could be quite stressful (and perhaps costly ) to go hunting for another bank?

piNoob

Yes, it may be stressful and perhaps costly to go hunting for another bank - but it is a helluva lot more stressful and heaps more costly to have to try to untangle an x-coll mess a few years down the track!!!

Best to get it right from the outset, methinks!

Cheers
LynnH

 

[quoll]

even if I use equity from my existing PPOR and literally borrow 105% ( as I won't use my money at all ) I still should be able to persuade bank that new loan should be only secured against IP I'm buying!

Doesn't sound like it will work.

Bank will lend 80% upto 95% against IP, new prop.
You need to borrow the rest (25% - 10%) of the cash against your PPOR. It will be an investment loan secured against PPOR only that you can use for anything you want.

You need 2 loans.

1 loan = Xcol
2 loans = no xcol

if I'm wrong show me, but I can't see 1 loan working how you want.

cheers
quoll

 

[gooram]

piNoob

Yes, it may be stressful and perhaps costly to go hunting for another bank - but it is a helluva lot more stressful and heaps more costly to have to try to untangle an x-coll mess a few years down the track!!!

Best to get it right from the outset, methinks!

Cheers
LynnH

I have recently just uncrossed 3 properties and found it to be a breeze actually. It cost me nothing and about a 1 hour meeting with my bank manager.
So if you need to cross-coll then don't be too concerned about uncrossing in the future.

Getting it set up right the first time is the preferred option of course

One question for the more experienced, let's say you do get a separate LOC credit for deposits on IPs, when you refinance to increase the limit on the LOC, do you pay stamp duty on the mortgage?

 

[Rolf Latham]

Hi Gooram

generally if you do a "top up" or equity pull...............then we are looking at only paying the duty on the new money.

ta
rolf

 

[gooram]

Hi Gooram

generally if you do a "top up" or equity pull...............then we are looking at only paying the duty on the new money.

ta
rolf

Thanks Rolf... and is that true regardless of whether it is drawn down or not?

 

[Rolf Latham]

yup

they like their cash...............

ta
rolf