Yet another XColl question

Sigh, everyone.

Here's some questions that are currently being debated and I have read through nearly all the Cross Collateralisation threads (XColl) that I could find.

Can I state the positions as I see it:

Simon thinks they are not necessarily terrible for all scenarios, but would avoid it if possible
Rolf L - thinks they are terrible, avoid at all costs
Mr Ed - thinks you should rather gnaw off your own arm than XColl.
Rolf S - thinks they are bad - don't do it

Banks want to do it because they want your continuing trail and it makes it hard for you to jump to new lenders etc, and they love security - way more than they need.

OK. Here's some questions:

Currently:
2 homes with Bank A - cross collateralised.
Loan 1 - PPOR
Loan 2 - IP1
PPOR has plenty of equity.
IP 1 has enough equity to stand on it's own feet with it's own non XColl loan.

Line of credit established, with security against PPOR AND IP.

HDT set up. Want to move forward.


Moving Forward:
UN XCOLL

If we were to UN XColl all loans, then scenario would look like:

Bank A
Loan 1 & LOC
Secured against PPOR
Loan 2 - Secured against IP1 only.

HDT
BANK B *(could also be bank A, but seperate for purpose of discussion)
80% of value of IP2.
20% + costs comes from LOC.

Question from broker:
Why Un XColl the two original properties?

Do you have to have small LOC against IP1 when it grows in value,
and further top up of original LOC when PPOR grows in value?

And moving forward from there:

IP 2 grows in value, set up LOC against it?

Then you have 3 LOC's..

IP 3 purchased wiht bits of LOC1 (original), LOC2, and LOC3.

As IP 3 grows, set up LOC against that (LOC4)


Yuk Yuk what an accounting nightmare!

Have I got this all wrong?

Or does a better scenario look like:

Loan 1 PPOR
Loan 2 IP 1

LOC1 secured by PPOR, IP1.


Then HDT

IP2 - 80% with new bank
20% plus costs comes from LOC1

As IP1, IP2, PPOR grow, somehow move equity to TOP up LOC1.

Also under HDT..
IP3 - 20% + costs from LOC1
80% from new bank

etc, etc, etc.

3rd Scenario

One loan for PPOR.
One loan for IP1
LOC - secured by PPOR/IP1
One big fat loan for HDT - with all further properties under that.


-------------------------
How do other people do this? with or without HDT thrown into the mix.

I need to understand WHY.


Second question raised by current lender:

Whilst all of the properties are independent (not X coll) then any
loan increases to extract equity from original Lenders
from the relative properties/facilities may be rejected on servicing
issues when they take into account the funding provided by other
financial institutions.

Anyone had any experience on this second question too?
 
G'day AC,

As I understand it ( and I could certainly be wrong )

Only thing I can think of, when considering "nibbling away at Equity with LOC's" is that there are minimum new loan amounts of around $30k when I last looked.

i.e. As your IP1 grows, you need to WAIT until it has increased by nearly $40k before you can get a $30k Equity LOC against it. So (again, IF I'm right...) this can slow you down somewhat.....

The contra would be to draw against the total Equity growth of PPOR AND IP1 (X-colled) and get a $30k loan much sooner.

Well, there ye go - I've got up to dance (probably pretty badly :D ) Let's see who can sort this out :eek: Am I making any kind of sense here? Or not? Am I in left field on the dance-floor ?????? ;)


Regards,
 
Hiya AC

Im being quoted a little out context here I feel:O), I do add that if can find a defined benefit for using xcoll, where it may outweigh the dramas then by all means use xcoll - there are some circumstances and if you dig around you will see thats true. You have to work out just how much mercury is tolerable for you.

BUT, remember that whenever a lender especially tells you anything with regard to where you are today, or where you might be able to they see the world through their eyes.

Once you get to their service or exposure walls, the world is flat - ipso facto. Dont go out there Mr Columbus, the earth is flat and you WILL fall off the edge..................

ta
rolf

PS question to original broker WHY xcoll in the first place ? it will cost you business long term ?
 
Hello alwayscurious

Sorry! Have I done something to offend you? Your short list of fraternal brokers does not leave much room for the sorority of brokers, so perhaps neither Medine or I should offer an opinion?

However, here is mine:

Using security in the most appropriate way is what it is all about. Real and appropriate structuring, not some abstract policy of ‘should’ do this or ‘shouldn’t’ do that.

Offering a lender the opportunity to secure a loan over more than one property can get you the last drop of equity, get you into postcodes or properties they would not otherwise consider, or enable you to minimise establishment costs and to create sub-loan accounts with greatest flexibility and least effort.

To cross-collateralise loans is neither here nor there, it is the motive and effect of doing so which is important.

Regarding Lines of Credit, well as far as I am concerned this is a conceptual stumbling block. Lines of Credit have their uses, but unless the application is appropriate, to arrange a Line of Credit when a bog standard, much cheaper loan with a redraw facility would do the same job is overkill.

Les has a valid point however minimum loan sizes or minimum up-stamping of an existing mortgage varies according to the lender. This is where good structuring to start with – building the foundations of your borrowing rather than just painting the walls – is what will take you into the future.

Minimum mortgage loans can be organised for as little as $5,000 from major lenders, and there is no need to be fancy – the ‘T’ model works just as well as the Lamborghini.

You are at the fork in the road, but no matter how well drawn up your investment plans are, they are just plans.

Sometimes, we can talk ourselves out of opportunities because they don’t fit our current perspective. There are times when we can expand, times when we must consolidate, and times when we just have to wait.

If each individual property is worth ‘X’, and your combined properties are worth ’Y’, and you choose to borrow to 95% when you buy, you can still only refinance to 90%LVR no matter whether the properties are with the same lender and formally securing one loan, two or more loans, or whether the properties are with separate lenders. Value is value, however buying a second property with the same lender as that which holds mortgage security over another property is going to be a bit smoother provided serviceability and other criteria are met.

If you have a house, and want to buy a shop or another house or a flat or some land, you still must have the equity and serviceability to cover the lender’s policies.

And regarding serviceability, if you owe $100,000 on property one and are paying eg the Standard Variable Rate of 7.32%, and want to borrow another $100,000 on another property which will also be at 7.32%, your combined borrowings are still $200,000 and you must still pass whatever sensitised rate the second loan / lender requires.

For example, many lenders add 1.5% above the standard variable rate to factor in the likely rise and fall of interest rates over the eg 30 years of the loan. If, on today’s earnings, you can service the loans at 8.82%, then they would most likely consider that you can service the loan on the actual product rate, which might today be eg 6.72%.

But you have to declare all your borrowings, mortgage loans, personal and vehicle loans, credit card limits etc. Some lenders will accept the actual rate of existing loans provided that the rate is fixed for three years. Other lenders will sensitise any loan at their servicing rate, and the interesting thing is, that often the lenders which do not sensitise the rate calculate the tightest serviceability. They may only take 70% of rental income, or add a factor of 10% to the gross loan, or insist on higher living expenses, or refuse to take negative gearing into account, etc.

So what is your real question:

How do I make the most of my equity, or

How do I qualify for more borrowings, or

How can I access equity as the properties grow in value, etc



When I was a child, I was not allowed to play with Meccano. Boys played with Meccano, girls didn’t. Now that I’m grown up, structuring things fascinates me. I always thought the Romans were onto something, and I reckon the most direct route – even if that means bridging rivers or tunnelling through mountains, is the best in the long run. The future is out there, and the financial meccano sets we build today, are the working financial power stations of our tomorrows.

Gaw! This is what comes from Daughter living in the shadow of the belching chimneys at Churchill, which I think has won some pollution awards this year! Never mind, a lucky Churchill resident won $12.8 million last week, bought a lottery ticket on an impulse. Now, he can afford to buy all of Churchill if he wants to, or maybe just upgrade the Monaro!



So, alwayscurious, there is no simple answer. What you do and where you go from here will depend not only on where you want to go but the vehicle you choose to travel in.

Good luck

Kristine
 
Addendum

Here is a little loan scenario postscript:

No: 2 Son Purchased Property #1 $165,000 May, 2005. 90%LVR, Interest Only

Opportunity comes to buy Property #2 $161,500 November, 2005.

Um. OK, Property #1 is probably worth about $185,000 (desperate vendor, etc) and is on a new lease of $190 per week, which would seem to indicate value.

So, how to buy?

I approach Lender #1, happy to cross collateralise, want to squeeze the last cent of equity and serviceability out of this.

Lender #1 regrets – even though Son lives at home, there is a minimum $10,500 single person’s living allowance, plus a minimum $5,200 board allocation. Fair enough, maybe one day when he refuses to clear up his room we’ll throw him out, but it won’t be this week.

So although serviceability was factored at 8.1% (he pays 6.69%, we can’t get to that hypothetical extra equity.

Lender #2 took the same expense serviceability line as Lender #1. Interestingly, they would take 100% of rent, but factored rent at 3.5% of property value. ‘We have a new lease’ I said. ‘Oh, good’ he replied ‘What do you think the property is worth?’ ‘Well,’ I said ‘Based on your 3.5% yield the unit is worth $282,285. I don’t think so. We’d be happy to establish value at $195,000.’

However, Lender #3 was OK with just the $10,500, accepted 100% of the rent, but factored the loan at 9.32%.

He passed serviceability with about $42 per month left over. Phew!

But – and here’s the but! What about the Funds to Complete? This leaves him about $25,500 short!

So – if he had been able to offer a deal to Lender #1, he would have been in the door with only a couple of thousand dollars to find. Yes, although this opportunity has come about unexpectedly, life is like that, and although we can shake the various loan piggy banks upside down and rake up the shortfall, it would have been a lot more convenient to just have all the money sitting in nice, organised, well documented loan funds.

So he will just have to limp along with this arrangement for a while. Not much point in refinancing Property #1 now – no refund on the mortgage insurance, break fees, etc, but Lender #2 is much more flexible, so we can apply to up-stamp the mortgage in about twelve months or whenever we are confident that the Property #2 can justify $195,000 (may be two years).

Or, when he turns 19 and earns more money, we may be able to go back to Lender #1 and up-stamp with them. Either way, there is always a way, but sometimes things get done in stages. Rome, for instance.

So cross collateralisation in this situation would have been ideal. He is buying for the long haul, and hiccups such as this are where the learning curve is at it’s most interesting.
 
AC,

I am a novice at this but I also am going through the same situation in planning my loan structure.

My thinking (I dont know if costs will make it non viable)

PPOR loan of $115k (PPOR value of $330K)

LOC loan of $25K (safety net)

LOC loan of $130K (to pay deposits on 2 IPs and avoid XCOLL)

I was ether going to do as you said and set up heaps of little LOC's against ips to fund the deposit on IP3, which as you said will be an accounting nightmare.

Or alternatively when the properties increase in value refianance them and pay down the LOC on PPOR which will allow me to finance the deposits on further IP's. This will mean that I should only ever have the 2 LOCs. The only flaw I have possibly seen with this is the hassle/cost of refinancing loans.

I believe that the interest on the refiananced part of the loans will still be tax deductable becuase it is being used to pay off the deposit in the LOC.

Please feel free to pick this plan to pieces as I would rather find faults now rather than later.

Cheers Pablo.
 
Kristine: No offense meant or taken.

You haven't offended me Kristine! I like your posts, and do read them!

I choose not to get offended, unless you deliberately set out to offend in the first place.
And then I check if they really did mean to offend me in the first place.
And then I choose to still not get offended.

(that's the plan anyway - still being outworked) :)

Sorry I didn't include you in the fraternity or sorority - it was a quick read of the all the available posts on XColl, and I tried to summarise what I THOUGHT I heard from the brokers that commented.

I may not have read all of them. In fact, I am sure I didn't read all of them.


Can I summarise what a few people have said here:

XColl is neither here nor there but depends on the initial purpose of doing so:
May be to squeeze every last bit of equity, in which case it can be a handy tool.

It may be poisoinous in the long run though, like mercury. (I'll go and cure another felt hat shall I?)

OK I can live with that.

The Second question now concerns me:

IF XColl is NOT used to create the LOC / Redraw facility, how to deal with the "nibbly bits" of equity from each property to then go and get new loans out?

Anyone else had experience in this situation?

Thanks once again for all your replies.
 
Pablo: / Rolf

Pablo said:
AC,

I am a novice at this but I also am going through the same situation in planning my loan structure.

My thinking (I dont know if costs will make it non viable)

PPOR loan of $115k (PPOR value of $330K)

LOC loan of $25K (safety net)

LOC loan of $130K (to pay deposits on 2 IPs and avoid XCOLL)

I was ether going to do as you said and set up heaps of little LOC's against ips to fund the deposit on IP3, which as you said will be an accounting nightmare.

Or alternatively when the properties increase in value refianance them and pay down the LOC on PPOR which will allow me to finance the deposits on further IP's. This will mean that I should only ever have the 2 LOCs. The only flaw I have possibly seen with this is the hassle/cost of refinancing loans.

I believe that the interest on the refiananced part of the loans will still be tax deductable becuase it is being used to pay off the deposit in the LOC.

Please feel free to pick this plan to pieces as I would rather find faults now rather than later.

Cheers Pablo.

Pablo, what you have proposed is similar to what I use.
similar to your "safety net" however against PPOR I have a small redraw facility
of about 8K. This is for private emergency use, and for small buffer on home stuff.

The LOC is strictly business ma'am. I don't touch it for private, having been warned that this is the equivalent to torturing kittens or teasing orphans.

Question still remains - where to go forward with the new properties.


ROLF:
PS question to original broker WHY xcoll in the first place ? it will cost you business long term ?

Answer:
The original XColl was because I didn't have a deposit, I only had equity.
When we first purchased IP1, I was recently arrived in Australia, all my cash went into PPOR deposit. We did not have two brass pennies to rub together!!
Shortly after, (1 year ish) I went to buy IP1. I put $100 down as deposit, and the rest was funded by the loan. - risky at the time but has proved to be a great little earner and the basis of (hopefully) a large portfolio.
 
Hi Always

From your description, your broker / lender gave you a very big helping hand indeed with cross-collateralising your properties. Buying without money is a great achievment and you managed to buy!

Regarding the scattered bits of equity, as mentioned (above) many of the lenders will accommodate up-stamping the existing mortgage, or write new mortgages with separate loan accounts for as little as $5,000.

However, the nibbly bits are a bit like making scones. After a while, no matter how you push the dough back together again, there simply won't be enough left to make another complete scone.

When you get to that stage, it's almost like writing Volume II. You get to start over again, begin a new cycle.

Serviceability is usually exhausted before equity is, and if that means dropping LVR to the lo-doc level, then there is even more dough left on the board.

That doesn't mean you can't keep buying, just that the structure must change, the deals are different, and you become accustomed to having more equity eg 20% or 25% bolstering the whole portfolio.

This is not such a bad thing, but it is almost an enforced winding down, eg the first $1,000,000 in borrowings may be bumping around the 95%LVR when you buy, settling down to 90%LVR across the securities.

The second $1,000,000 may be at 80%LVR, and the third $1,000,000 may be sludging around at the 65% level.

Overall, your $3,000,000 in borrowings would be running at a reasonable level - say, about the 80% mark, which would be sensible, anyway, in case of fire sales.

By that time you're not fretting about $10,000 in equity here or there - the properties grow while you sleep and there may be whole days or even weeks when you don't add their value up just for the sake of it.

Let us know when you hit the $3,000,000 borrowing mark and tell us how it feels.

Ciao!

Kristine
 
Last edited:
you make me smile.

Kristine.. said:
Hi Always

From your description, your broker / lender gave you a very big helping hand indeed with cross-slllateralising your properties. Buying without money is a great achievment and you managed to buy!

....
Let us know when you hit the $3,000,000 borrowing mark and tell us how it feels.

Ciao!

Kristine

a) I am starting to understand where XColl is useful or not.

B) 3M borrowing level?
For that, you will have to wait, until tommorrow. :)

Cheers all - thanks for helping with with a sticky bun situation.

We all had to use our scone(s) and I am hoping it will help us all to RAISE
more dough. :)

After all it is a CURRANT topic of conversation...

(I wonder if geoffw will BITE at this..)
 
Food for thought against x-coll:

scenario 1:
5 properties, all x-coll with a major lender;
client sells one property
possible outcome: bank keeps sales proceeds to reduce overall exposure

scenario 2:
5 properties, all x-coll with a major lender;
one property has had good capital gains
2 properties had no capital gains
2 properties had negative capital gains
most likely outcome: you have no equity access

just my 5 cents.

PS: There are ways to purchase properties with only having equity; there is almost never a need to x-coll
 
heheh Rolf S

these arent some arbitary scenarios - these are real life, with real people being affected im sure.

Ive had exactly those types of issues in clients with slightly different numbers, and a few others too, as Im sure you have too



ta
rolf
 
Hi All,

I'm with Rolf S's last post.

As you can see in his post X/coll isn't a problem until it becomes a problem.

Most common time that I see it becomming a problem is when you find a real good oppertunity, and your existing funder won't / can't help. Then you'll realise what sort of problem you have.

Sometimes you need to X/coll, but only do it on your terms with a pre meditated reason.

I'll go back to gnawing arms off
 
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