why not cross collateralise?

[Paul j F]

Another thread seemed to be going down this path so thought I'd start afresh.

I am curious to get some examples of why to not to xColl. I have heard "it'll hurt you in the long run.. they have you by the short and curly's" etc... I xColl as it suits my situation/strategy eg. buy, add value, and hold.

I don't envisage selling in the near future so paperwork or the lender dictating what happens with proceeds from a sale is not an issue.

I am comfortable with my LVR and ability to meet repayments.

I have extended my loan(s) with current lender and have more than 30% deposit ready for my next/current investment

I am seriously thinking I might go with another lender this time (although none have met current lenders rates/conditions) ...maybe I am short sighted but why this DO NOT xcoll. ?

 

[Aaron_C]

There are many reasons that the other guys will say - but for me one of the main reasons is because each time you need to get money out, you gotta do valuations on ALL properties - and if one has happened to drop / get a bad val you may need to top it up. It has happened in the past. Plus all the other stuff with concentration risk etc but I don't have time to list it all out.

 

[Jamie M]

Another thread seemed to be going down this path so thought I'd start afresh.

I am curious to get some examples of why to not to xColl. I have heard "it'll hurt you in the long run.. they have you by the short and curly's" etc... I xColl as it suits my situation/strategy eg. buy, add value, and hold.

I don't envisage selling in the near future so paperwork or the lender dictating what happens with proceeds from a sale is not an issue.

I am comfortable with my LVR and ability to meet repayments.

I have extended my loan(s) with current lender and have more than 30% deposit ready for my next/current investment

I am seriously thinking I might go with another lender this time (although none have met current lenders rates/conditions) ...maybe I am short sighted but why this DO NOT xcoll. ?

Hi Paul

You can have your next loan with the same lender but still keep them uncrossed.

You said you've already arranged an equity release which will cover a 30% deposit, then just set-up the remaining 70% as a stand alone loan with the same or another lender.

If you're increasing your borrowings with the same lender than you may be able to negotiate on the rate that is applied to all of your loans (new and existing).

Cheers

Jamie

 

[The Y-man]

There are many reasons that the other guys will say - but for me one of the main reasons is because each time you need to get money out, you gotta do valuations on ALL properties - and if one has happened to drop / get a bad val you may need to top it up. It has happened in the past.

Yep - let's say you have 2 properties x-coll'd and you sell one.

They revalue the other one that you still have, and use the proceeds of the sale to top up the loan. i.e. even though you sell a property for profit, you may see $0 of the sale proceeds!!

The Y-man

 

[The Fence]

I don't envisage selling in the near future .....

So you have accounted for any unforeseen disasters that may or may not occur?

Just reduces risk a bit more and allows more flexibility.

My broker advised correctly to have separate loans on all IP's, I insisted on having 2 of them Xcolled....guess what...there is a good case for selling one of those IP's and right now, as they are xcolled, not an option or shall we say difficult to do, but if on a separate Mort, easy.

I too said I'd never sell....as it turns out it's stopping me from selling.

Hmmmmmaybe a good idea after all...

Ignore...

Just an example.

 

[Rolf Latham]

Let me toss it back : )

WHY cross Coll ?

I need to update this puppy since there are about 5 more caveats

this thread has a longish post in it about some of the pros and cons

http://somersoft.com/forums/showthread.php?t=17677


My simple version

Xcoll is a tool to be used to borrower advantage in some SPECIFIC and isolated circumstances.

The way much of the finance industry uses it is like the safety argument about not wearing a motorcycle helmet. You dont know you are in trouble before you are knee deep in it.

ta
rolf



ta
rolf

 

[Rolf Latham]

.

I don't envisage selling in the near future so paperwork or the lender dictating what happens with proceeds from a sale is not an issue.

Life is what happens to you while you are making other plans.....Lennon


This ongoing discussion is akin to the one that a 17 year old boy has with his Parents....................its hard to relate the experience until it becomes personal.

ta
rolf

 

[Paul j F]

Thanks.. as per usual some good sound advice from the forum.. Staying with the same lender but standalone for this one.

Yeah .. circumstances can change.

Converted...

 

[alexlee]

Thanks.. as per usual some good sound advice from the forum.. Staying with the same lender but standalone for this one.

Then you're not actually x-colling, are you?

 

[Terry_w]

Cross collateralising means you are using more than one security for the loan.

This can, and often does, cause problems when you want to sell one property.

Imagine you have 2 loans and 2 properties but the second loan is secured on the first property and the second. What happens if you want to sell the first property?

The bank will then have to consider whether to grant a release of security. So you would have to have property 2 revalued again. What happens if property 2 has dropped in value? The bank would require you to pay down the loan on this property - what if it is an investment? You would be using cash which you may need for the new PPOR down the track. This will mean adverse tax consequences...

This is the main reason, but there are others as well.

Imagine if you defaulted and were in trouble. The bank could sell either property to pay down the debt. If the properties were stand alone you might choose to sell one or both and would have more control on timing etc.

Also, what if your current lender says no more loans and you want to take one property to another bank. You may be stuck.

 

[Marty McDonald]

the winner is stand alone (again)

 

[wobbycarly]

Yep - let's say you have 2 properties x-coll'd and you sell one.

They revalue the other one that you still have, and use the proceeds of the sale to top up the loan. i.e. even though you sell a property for profit, you may see $0 of the sale proceeds!!

The Y-man

Or they pay out the "wrong" loan and you end up with a lower then expected tax-deductible loan.

 

[Peter_Tersteeg]

Last week we had settlements for two refinanced loans from Westpac. The borrower wanted to refinance the loans to put the funds towards an new purchase which settled this week. They also have their own home (with a mortgage) with Westpac. That mortgage had a substantial amount of redraw in it which they intend to access for the renovation of their new purchase.

It turns out all their Westpac properties were cross-collateralised and they didn't realise it. Westpac was willing to release the titles of the two refinances, but first they ordered a valuation on their home which was remaining with Westpac. The valuation came in below the clients anticipated value (happens a lot lately). As a result, Westpac cancelled $30,000 of the redraw and now it looks like they'll struggle to find the funds to do all the renovations they wanted. They've owned all of these properties for over 4 years.

Their loans could have easily been structured years ago to avoid cross-collaterlising, but because they got their structure wrong, it derailed their plans years after the event. Naturally they're annoyed at me because I'm the person they're dealing with today, not the the person at Westpac who screwed them over with a disadvenatgious structure years before.

In this entire scenario, no properties were sold and there's an excellent repayment history on all loans.

 

[Peter_Tersteeg]

On the other hand, let me give an example when we have cross-collateralised recently.

A client wants to buy a new PPOR and will sell their exisitng PPOR. There's lots of equity in the existing PPOR but they haven't sold it yet. They've got good incomes and affordability isn't an issue, they could even afford to hold both.

In this scenario many people would use bridging finance. There's several catches with this type of scenario:
1. It's expensive as many lenders finance it as standard variable rates (not discounted pro-pack rates).
2. Bridging finance is usually only good for 6 months and there may be issues if you don't sell within that timeframe.
3. Bridging finance walks a very fine line under the new NCCP responsible lending laws, so lenders don't like it. Getting it approved is a nightmare.

The easy solution is to cross-collateralise the new property with the old one, with the intention of reducing the loan down to an 80% LVR on the new property when the old one sells. The risk is that when the previous property sells, it might not sell as expected and the end LVR would go above 80% and cause problems. This was a very low risk in this case as the equity position in the first property was extremely good. Additionally lenders are also likely to recognise the purchase price valuation if it's less than 6 months old.

We also facilitated the anticipated loan reduction by setting up the cross-collaeralised loan with a split so that one part was at 80% of the new purchase price and the second part was for the required balance and would be paid off with proceeds from the sale. In essance this was a big nudge to the lender on what to do on the sale of property 1.

We could have set up a new LOC against the first property and used this to fund a cash deposit against the second property and if they had any intention to keep both that is certainly the path we would have taken. Given the short purchase timeframe we discussed this but decided to keep things simple. This structure kept the whole deal to a single application, including a single credit check.