x collateral

[Terry_w]

Last year I had a guy from the forum approach me. He had about 5 properties cross collateralised and he had heaps of equity. His plan was to sell one and to spend a few years living off the funds released. I think the properties were cashflow neutral so not enough to live off the rents yet. But because he had the equity he quit his job and was about to 'retire'. By the time the capital ran out his rents would have increased and he could live on them, or sell another property.

So in anticipation he quit his job. He then sold a property. The bank refused to release the mortgage unless all the funds were used to reduce the other loans he had. Afterall, he had no job, so they didn't want the added risk.

This kind of ruined his retirement plans.

 

[wylie]

Hi Wylie, is your PPOR crossed with your IPs? if it is, is it possible to just uncross your PPOR only from the other IPs?

Yes, it is crossed. I'm not overly concerned because we have no plans of buying again. I don't think we could borrow. But it is something I plan on checking out so that if we sell one property we won't be forced to reduce our loans by the total sale proceeds.

Edit - Just saw terry's post and this was our fear, but our bank didn't force it. We were lucky. I don't want to assume they will not force it if we sell anything else.

 

[Rolf Latham]

is it possible to just uncross your PPOR only from the other IPs?

Sometimes its possible

Often its no more possible than unscrambling an egg especially where higher LVRs or fixed rate loans are involved

ta
rolf

 

[ndonnelly]

So just to understand x coll is a problem because you may want to sell a property but depending on the capital movement the bank might not let you sell as your remaining LVR on existing properties will move to a dangerous level. Is this level more than 80% normally?

As a result they might require you to either top up your mortgage with your own funds or pay LMI to keep the bank happy.

So if the above is true then the only option to get a new loan for an IP is to pay a cash deposit and base your loan excluding equity in another existing property. This would make them independent.

Does this sound about right?

The reason I ask is because I have a PPOR which is x coll against a IP purchase settling Jan 30. I am a little concerned because down the line I might want to sell one of these properties to fund purchase. I guess selling both won't cause an issue but selling one might based upon the initial logic of x coll.

Anyway, thanks for reading and let me know your thoughts if you have a chance

 

[Terry_w]

So just to understand x coll is a problem because you may want to sell a property but depending on the capital movement the bank might not let you sell as your remaining LVR on existing properties will move to a dangerous level. Is this level more than 80% normally?

As a result they might require you to either top up your mortgage with your own funds or pay LMI to keep the bank happy.

So if the above is true then the only option to get a new loan for an IP is to pay a cash deposit and base your loan excluding equity in another existing property. This would make them independent.

Does this sound about right?

The reason I ask is because I have a PPOR which is x coll against a IP purchase settling Jan 30. I am a little concerned because down the line I might want to sell one of these properties to fund purchase. I guess selling both won't cause an issue but selling one might based upon the initial logic of x coll.

Anyway, thanks for reading and let me know your thoughts if you have a chance

That doesn't sound correct to me.

Even if the remaining LVR is 30% the bank could still require you to pay down the loan on the remaining property if you sell of one of the security properties

And there is another option to that of paying cash and that is to borrow the deposit and use this to get a stand alone loan for the new purchase.

 

[Beanie Girl]

Even if the remaining LVR is 30% the bank could still require you to pay down the loan on the remaining property if you sell of one of the security properties

Wow! That's a shock to me. I'm dumbfounded.
Didn't know banks can be such b#@**&ds!
Are they well within their rights to demand such things just because these securities have been 'given over' to them'?
Have we surrendered our rights, and now they can do as they please simply because properties are X-coll?
Aren't there limits to their behaviour?
Surely, they have to behave in a 'reasonable' manner'?

 

[Terry_w]

Wow! That's a shock to me. I'm dumbfounded.
Didn't know banks can be such b#@**&ds!
Are they well within their rights to demand such things just because these securities have been 'given over' to them'?
Have we surrendered our rights, and now they can do as they please simply because properties are X-coll?
Aren't there limits to their behaviour?
Surely, they have to behave in a 'reasonable' manner'?

It is reasonable that they do this.

Say, for instance, you stopped working and could no longer demonstrate that you can service the loan. You sell one property thinking you can live on the proceeds of the sale and the remaining property loan will be covered by the rent. But your serviceability does not meet the requirements. The bank can take or insist on part or all of the proceeds from the sale be used to pay down the remaining loan.

If the properties were stand alone this would not occur because the sale of a property won't trigger any revaluations or reassessments of any remaining loans - even at the same bank. There may be exceptions, but this is generally the case.

 

[joanmc]

My 2 cents...
If you can avoid it, then for the love of god DON'T DO IT!!!!!!!!
We are now in a very difficult spot with 2.3 mill spread over 9 properties all with one bank. The reasons are many and it is a sad, tragic story that would take way too long to type. lol.

And now, if we were to sell one it would trigger a hideous house of cards scenario where we would probably lose the lot and have to start again.

We didn't expect to be in this position, but then one usually doesn't......so didn't see the real problems until they were upon us.

No income and property value drops that made our LVR go from 80% to 95% so any sale would trigger revals that just would not add up and the sale price would not be enough to fix the LVR problem back to 80%.

 

[travelbug]

I think the reason most people cross coll is lack of knowledge. When we first thought of buying an IP the band said yep we can lend you $800K. In the end we got a LOC for $700K based on us buying a off the plan property (all arranged through to off the plan place). In the end we bailed on the OTP and bought another place.
Great we thought. We had $300K left so bought another place with the $300K. That was unsecured as we paid "cash".

That was in 2008 when I discovered this forum. We actually secured a loan against IP2 and that gave us money for deposits on the rest (which we made sure were stand alone). When we went to sell PPOR we split PPOR and IP1.

It was a worry though. There was still more owing on IP1 than it was worth (as we actually bought 2IP's with that money) so the remaining transferred to our new PPOR.

When I went to refinance 4 IP's with comm the loan documents came back to sign. All properties had the 4 properties listed. The banker "assured" me they weren't crossed. I had them redone before I signed.

You don't know what you don't know. That's where this forum is great.

 

[Rolf Latham]

My 2 cents...
If you can avoid it, then for the love of god DON'T DO IT!!!!!!!!
We are now in a very difficult spot with 2.3 mill spread over 9 properties all with one bank. The reasons are many and it is a sad, tragic story that would take way too long to type. lol.

And now, if we were to sell one it would trigger a hideous house of cards scenario where we would probably lose the lot and have to start again.

We didn't expect to be in this position, but then one usually doesn't......so didn't see the real problems until they were upon us.

No income and property value drops that made our LVR go from 80% to 95% so any sale would trigger revals that just would not add up and the sale price would not be enough to fix the LVR problem back to 80%.

most would say a rareish example............ reality is otherwise.

not many have the courage to report it

ta
rolf

 

[wylie]

Joanmc's story makes me realise we were very lucky for the bank to allow us to keep $200K of the sale proceeds and reduce our loans by the cost base of the house we sold, which was $100K. They could easily have asked for all the sale proceeds.

We knew this was possible, and had it happened, it would have been less than ideal, but we would have worked around it. After all, we were keeping the proceeds to pay loans and if the loans were reduced by $300K rather than $100K it would have been okay.

However, had we really wanted that $200K for something else and had the bank kept the lot, we would have been mighty peeved.

Now, of course, we cannot easily unravel our ex-col, but we are lucky that we don't have as big a portfolio tied up together and we have access to other funds if we sell one and cannot do what we want with the funds.

And, I also didn't know and had never heard about x-col until reading about it here. I believe people don't know what they don't know until they find out .

I've learnt so much from this forum.

 

[Beanie Girl]

No income and property value drops that made our LVR go from 80% to 95% so any sale would trigger revals that just would not add up and the sale price would not be enough to fix the LVR problem back to 80%.

joanmc, would it be possible or easy to get an income (job, business etc) again in the forseeable future?

 

[ndonnelly]

That doesn't sound correct to me.

Even if the remaining LVR is 30% the bank could still require you to pay down the loan on the remaining property if you sell of one of the security properties

And there is another option to that of paying cash and that is to borrow the deposit and use this to get a stand alone loan for the new purchase.

Thanks for that.

Is my logic still correct though in that it is the banks prerogative to re-assess your LVR if you decide to sell one of your properties and you might need to use some of the sale proceeds to top up an existing mortgage or at worst they would not even let you sell your property

 

[Brady]

Yes your properties are crossed, banks won't allow you to have full sale proceeds unless the remaining securities are inside their acceptable LVR levels which might mean that you have to put sale proceeds towards reducing a loan that you don't really want to. Even worse still they could stop the sale.

Sometimes the use of a security substitution to a Term Deposit as security will stop the reduction in loan, but then bank holds the cash as security until replaced usually by a new property being purchased or decrease in LVR (could by CG from the property).

But all in all correct structuring and the right conversation at the start would say you all the hassles

 

[Beanie Girl]

It is reasonable that they do this.

Say, for instance, you stopped working and could no longer demonstrate that you can service the loan. You sell one property thinking you can live on the proceeds of the sale and the remaining property loan will be covered by the rent. But your serviceability does not meet the requirements.

Hi Terry, would not the rent covering the property loan (and possible CF+ even) be considered as sufficient to service the loan (serviceability)?

Why is it that, by not working (i.e. no job), one is considered 'no longer able to service the loan'? Surely the property is paying itself off with the rent it receives (e.g. P & I)? Isn't the rent sufficient to 'service' the loan?

Sorry to ask these questions. I thought I understood what 'serviceability' meant in the layman sort of way, but now I think I am actually ignorant of the financial or practical meaning of 'serviceability' as defined by the financial world.

 

[Brady]

Hi Terry, would not the rent covering the property loan (and possible CF+ even) be considered as sufficient to service the loan (serviceability)?

Why is it that, by not working (i.e. no job), one is considered 'no longer able to service the loan'? Surely the property is paying itself off with the rent it receives (e.g. P & I)? Isn't the rent sufficient to 'service' the loan?

Sorry to ask these questions. I thought I understood what 'serviceability' meant in the layman sort of way, but now I think I am actually ignorant of the financial or practical meaning of 'serviceability' as defined by the financial world.

What about if you have other loans, credit cards and debts to repay as well?

What about your cost of living?

Rates, water, maintenance & insurance etc...?

Serviceability is all of these things, using the banks calculators not your own. Banks usually are risk adverse so likely little harsher then your own calculations.

 

[ndonnelly]

Yes your properties are crossed, banks won't allow you to have full sale proceeds unless the remaining securities are inside their acceptable LVR levels which might mean that you have to put sale proceeds towards reducing a loan that you don't really want to. Even worse still they could stop the sale.

Sometimes the use of a security substitution to a Term Deposit as security will stop the reduction in loan, but then bank holds the cash as security until replaced usually by a new property being purchased or decrease in LVR (could by CG from the property).

But all in all correct structuring and the right conversation at the start would say you all the hassles

Thanks Brady

Is 80% the norm for banks to stay happy?

 

[Brady]

Thanks Brady

Is 80% the norm for banks to stay happy?

Depending on what your existing LVR is and if you already have LMI.

If you don't have LMI then yes needs to be under 80%, if it's over and you didn't have it already would be a whole new application required as would have to meet the mortgage insurers requirements.

 

[ndonnelly]

Depending on what your existing LVR is and if you already have LMI.

If you don't have LMI then yes needs to be under 80%, if it's over and you didn't have it already would be a whole new application required as would have to meet the mortgage insurers requirements.

Ah, so assuming you have paid LMI to say, 85%, then you need to stay at that level or below. If you go above to say 90% then you pay LMI on the 5% differential

 

[Brady]

Ah, so assuming you have paid LMI to say, 85%, then you need to stay at that level or below. If you go above to say 90% then you pay LMI on the 5% differential

Need to stay below the 85% along with also having approval from the mortgage insurer.