x collateral

Hi Members

So we all know we should avoid x collateral as best of possible.

We also know some just had little choice but to x collateral.

So if you had had to chose the x collateral, what could have been the reasons

Please share your experience with the rest of us

T
 
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Two circumstances where xcoll tends to be used...

1. Family pledge, where a first home buyer gets assistance from their family to purchase a property.

2. When you're selling an existing house and using the proceeds to purchase a new home, but the first property isn't sold yet. Crossing the two can get the job done quickly and simply. The xcoll is removed when the first property is sold.

Very rare that you need to xcoll. There's rarely an advantage to it.
 
Two circumstances where xcoll tends to be used...

1. Family pledge, where a first home buyer gets assistance from their family to purchase a property.

2. When you're selling an existing house and using the proceeds to purchase a new home, but the first property isn't sold yet. Crossing the two can get the job done quickly and simply. The xcoll is removed when the first property is sold.

Very rare that you need to xcoll. There's rarely an advantage to it.

#2 is the only time I x-coll unless the client specifically asks (try talking them out of it but sometimes they are very stubborn, well their wifes are... not wanting 'two loans')

Usually they will come in requesting a bridging loan and have been able to service is on usual conditions but still wanting quick simple process.
 
Lack of time usually.

+1 on that.
I had to bail on a crap broker and find a new broker and get the deal over the line with finance extensions and ended up with a sub ideal situation of 2 properties crossed to the new deal.
I didn't realise it at the time but my broker explained it was the quickest way to meet the deadlines as setting up LOCs etc from the 2 properties and new deal just wasn't going to happen in time.
I'll be fixing it up next year when construction is finished and I can do a reval to uncross.
 
The time taken to process the applications so it's not x-coll takes longer as it's application for each property, but still not personally an acceptable excuse.
 
+1 on that.
I had to bail on a crap broker and find a new broker and get the deal over the line with finance extensions and ended up with a sub ideal situation of 2 properties crossed to the new deal.
I didn't realise it at the time but my broker explained it was the quickest way to meet the deadlines as setting up LOCs etc from the 2 properties and new deal just wasn't going to happen in time.
I'll be fixing it up next year when construction is finished and I can do a reval to uncross.

Yes, we have done this, just to get everything to happen (portfolio swap, 4 different lenders, simultaneous settlements etc)! Very quickly chewed through Plan A, B, C, D, E and finally got it done in the end by a fair amount of legwork on the final day/hrs/mins!

Was removed 3mths later using new vals. Was very worth it!

Outside of that, Rolf posts up a nice thread/post regarding XColl that's worth reading.

pinkboy
 
i just saw an article in this month's API magazine where Margaret Lomas said that x-collateral is not a bad thing at all because she said that even if you did not pledge your property, as long as you owe bank they can still force you to sell your assets to pay up.

another question regarding x-collateral, is it bad because it can get messy meaning multiple properties sharing 1 collateral? what if its simple like PPOR and 1 investment property only. that should be easy to uncross right so not to worry if you are in that scenario?
 
i just saw an article in this month's API magazine where Margaret Lomas said that x-collateral is not a bad thing at all because she said that even if you did not pledge your property, as long as you owe bank they can still force you to sell your assets to pay up.
?

yes, but.................... xcoll where not needed is like letting the ATO do your tax planning..................

For normal ma n pa resi investors Xcoll makes no sense at all for the borrower, and "i had to xcoll" is usually but not always a defensive emotional response to an obviously logically silly thing to do, willingly.

The facts for xcoll as a positive strategy simpy dont stack up.

This mouldy oldie below is near 10 years old, almost all of it still applies, and there are 5 more that we can add.

http://somersoft.com/forums/showpost.php?p=120656&postcount=6

ta
rolf
 
i just saw an article in this month's API magazine where Margaret Lomas said that x-collateral is not a bad thing at all because she said that even if you did not pledge your property, as long as you owe bank they can still force you to sell your assets to pay up.

This is only half true.

At the end of the day the banks could force you to sell all assets to satisfy a judgment. But having properties stand alone along the way allows you to start selling on your own terms if and when you choose. Mortgaging a property allows the bank to take possession much quicker and they could choose any property they hold as security.

Example

Mr Bumburp owns 3 properties valued at $100,000 each. His loans are $80,000 each and cross collateralised.

Mr Bumburp suffers from a heart attack (due to a build up of wind). His 2 tenants leave and he can't pay the loans. His third tenant is still paying the rent.

Bumburp sells property B for $80,000. Values have fallen and he needed a quick sale. Elated, his heart starts beating a few extra beats because of the sale. He sends in the discharge of mortgage forms only to find out the bank wants to revalue his remaining 2 properties before they release the mortgage. All values come in a bit lower, say $90,000 each.

Since his remaining loans are $160,000 and the values are $180,000 the bank will only release the mortgage if the remaining loans are 80% or less LVR. This LVR sits at 88.9% so the bank wants the loan reduced to $144,000 (80%) by reducing the loans by $16,000. Or LMI would need to be applied for and the premium paid. Mr Bumburp is not working and could not qualify for LMI.

The sale falls through because of the delay and the bank no releasing the mortgage. Mr Bumburp now gets even more behind and has a second heart attack - his wife also decides to leave him he treads in dog poo on the way to the postoffice.

But, if Mr Bumburp did not cross collateralise things would have turned out much differently. His sale would have proceeded. The discharge of mortgage would have only depended on the repayment of the loan attacked to the property being sold.

He would still have the other 2 properties and loans as is and he could sell these properties independantly. He could, for example, keep repaying the loan on one of them and only worry about the defaults on the other (assuming his cashflow not enough). If he could not pay he could strin things out for months and this would allow the sale of one or more of the remaining properties.
 
Further to Terry's excellent logical and factual post............ non xcoll AND using different lenders buys you time, sometimes only 90 or 180 days, but the difference can be HUGE.

The space between mortgagee auction, and you selling when you want to, to whom you want to can mean the difference between comfy retirement, vs potential bankruptcy.

ta
rolf
 
I've just thought of one reason why you may want to cross collateralise.

say Mr B had heaps of equity, but no more serviceability. He could team up with Mr C who may have a high income but not equity.

They could jointly buy a house, or be jointly involved in a trust or a company. This could get the loan over the serviceability hurdle, but the deposit would still be required.

To get the deposit they could try to get a joint LOC/IO loan secured by Mr B's property. I am not sure how a lender would view this, as I have never seen it happen. It probably wouldn't be too welcome. But what they could do is to use Mr B's existing property as security for the new one - ie cross coll.
 
xcoll strategy

I just wanted to run our situation past you guys so I can fully understand the consequences of out Xcoll strategy.
My girlfriend and I have joined forces to invest in property. I have a large income but I've used my lending power on my PPOR (only to 80% LVR so its not that bad). My girlfriend has a large lump of cash from her divorce but no serviceability because she is studying. We decided to put her money in my PPOR LOC and use the combination of my income and her equity to buy an IP.
We are very much learning as we go so when we sat down with our lender I pushed for a situation where the equity stayed in my PPOR LOC and the LOC was extended to cover 100% the new IP (I later found out this is xcoll. It looked like this before - 370K LOC on PPOR with 200K cash in it. After it looked like this 300K LOC on PPOR with 200K cash in it plus 270K LOC for IP).
My belief is that we needed to leave our capital on the PPOR segment of the loan to minimise undeductible interest being paid and expose 100% of the IP loan so that deductible interest is paid. We are currently building a townhouse in the back of our IP and extending our loan as above.
Our plan is to finish building and renovating our properties, rent them out and hold them. After a few years when we think we have some growth we will probably refinance to sort out the xcoll and release equity.
I understand now why we should not xcoll our loans but I also wonder if it isn't that big an issue if you have enough risk managment built into your strategy. We have the 200K available at all times and I have 2 years income protection if something happens to me. It also maximise our tax as well.
I'm really interested in any feedback. We are now working with a planner but one thing I've learnt last year is to be well informed so you can pick up when you are being lead down the wrong path.
Thanks for your time in advance.
 
I just wanted to run our situation past you guys so I can fully understand the consequences of out Xcoll strategy.
My girlfriend and I have joined forces to invest in property. I have a large income but I've used my lending power on my PPOR (only to 80% LVR so its not that bad). My girlfriend has a large lump of cash from her divorce but no serviceability because she is studying. We decided to put her money in my PPOR LOC and use the combination of my income and her equity to buy an IP.
We are very much learning as we go so when we sat down with our lender I pushed for a situation where the equity stayed in my PPOR LOC and the LOC was extended to cover 100% the new IP (I later found out this is xcoll. It looked like this before - 370K LOC on PPOR with 200K cash in it. After it looked like this 300K LOC on PPOR with 200K cash in it plus 270K LOC for IP).
My belief is that we needed to leave our capital on the PPOR segment of the loan to minimise undeductible interest being paid and expose 100% of the IP loan so that deductible interest is paid. We are currently building a townhouse in the back of our IP and extending our loan as above.
Our plan is to finish building and renovating our properties, rent them out and hold them. After a few years when we think we have some growth we will probably refinance to sort out the xcoll and release equity.
I understand now why we should not xcoll our loans but I also wonder if it isn't that big an issue if you have enough risk managment built into your strategy. We have the 200K available at all times and I have 2 years income protection if something happens to me. It also maximise our tax as well.
I'm really interested in any feedback. We are now working with a planner but one thing I've learnt last year is to be well informed so you can pick up when you are being lead down the wrong path.
Thanks for your time in advance.

That sounds like an inefficent set up. Before I say more could you please give the loan amounts and splits.

Not sure that it maximises your tax deductions - maybe the opposite.
 
Ok Terry. PPOR loan was 336K before we did anything. My girlfriend put 250K into that loan.
When we are finished building our loans will be 243K for the PPOR, 270K for the IP plus 305K for the build. All are LOC but different accounts. Our cash sits in the PPOR account.
I would be greatly interest in how you would do it. I always tell apprentices that making a mistake isn't a problem, doing it twice is.
 
Ok Terry. PPOR loan was 336K before we did anything. My girlfriend put 250K into that loan.
When we are finished building our loans will be 243K for the PPOR, 270K for the IP plus 305K for the build. All are LOC but different accounts. Our cash sits in the PPOR account.
I would be greatly interest in how you would do it. I always tell apprentices that making a mistake isn't a problem, doing it twice is.


Loan 1 is $336k - 250k = 86k, but build so 243k
Loan 2 = 270k
Loan 3 = 305k
Cash = sits in PPOR

Loans 2 and 3 for the investment?


Cash doesn't sit in the PPOR, but you have paid down the loan. This may not be an issue, but I would have had the PPOR loan IO with a 100% offset account. This way the cash could sit in the offset. Now, if this property were to become income producing there would be tax issues.

Loan 2 and 3, why are these LOCs? Do you only pay interest each month or make additional deposits?
 
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