From: D R

What is wrong with x-collaterallisation?

Ok, we have all heard that is is better to structure your finances such that each IP is stand alone.

What I would like to know is, what are the major advantages to x-collaterlisation?

For example. If you have 6 IPs and want to have one big LOC(Line of credit) then x-coll is the only way to do it. Please correct me if I am wrong.

Sure, keep your own home as stand alone so that the Tax Man can clearly see what is personal debt and what is investment. But when you get a few IPs going then why not x-coll. It is very easy to refinance each IP to another lender even when they are x-coll. Just remove that property as security from the mortgage and payout its part of the debt from the money you get after refinancing.

Can anyone else add to the disadvantage/advantage thing.

I am sure there are heaps(well, a couple anyway) of people out there that would be able to add to this topic.


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Reply: 1
From: Rolf Latham

Hi Darren

There is nothing wrong with cross collateralisation if you are a lender.

If you are a borrower the negatives usually outweigh the positives.

The only positive is that yes you can have one big loan, save loan maintenance costs and simplify your life. There are other ways to achieve lesser holding costs in any case.

Some of the negatives are:

1. All properties with one lender - risk management issues unless they are locked away in separate trusts.

2. Mortgage Insurance issues - LMI is payable on the total security value not just
the individual property geared to 90 % or more.

3. Excess security, commonly x-coll results in the lender holding more security than is required.

4. Your lender will have you by the collar, and when you need access to equity to do something creative with another lender, yes you can refinance one property out of your portfolio to move it to another lender. Seems simple but a real pain which takes time and costs excess money, and depending on what 2 or 3rd mortgage secures what, may actually be impossible unless you explode the entire structure.

5. If you are using your home to secure an IP, setting up separate securities ensures the lender will actually do some basic due diligence on the IP in regard to value. This is important for those people who are buying an IP in a market where they have no real idea of the values

6. Self supporting securities can be moved from lender to lender to get the best deal at the time with less hassle.

Never, ever give one lender all of your portfolio on a cross collateralised basis if you have more than say 4 properties and you want to keep building. You wont know how much of a problem this can be until it inevitably happens !


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Reply: 1.1
From: Sam Vannutini

Hear Hear!
Never give one instituion total control.
If one property goes bad, they can close you down on the lot.
I'm also told that if you have a credit card with them, and there is a dispute, they can close the lot.
Is this correct? Is this an "all monies" mortgage?

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