Apparently it's okay to xcoll?

Discussion in 'Loans & Mortgage Brokers' started by Beelzebub, 25th Oct, 2015.

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  1. Phantom

    Phantom Well-Known Member

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    I definitely agree with this.
     
  2. Marty McDonald

    Marty McDonald Mortgage broker Business Member

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    This has all been covered before but yeah it all works nicely if every property goes up in value and you don't want to sell anything.

    My pragmatic approach is 2 properties crossed while not ideal is sometimes acceptable depending on circumstances but never any more than that and with a view to uncross down the track.

    • Bad valuations - 1 or 2 bad ones across a portfolio of properties will cause major problems. Both when buying and selling. If all crossed and selling the lender will do a partial discharge meaning they will assess your remaining security values and you wont know the outcome of that until after you have exchanged on the sale. I don't like that kind of uncertainty. If all crossed and buying you are again relying on all the properties being valued again. Not only a pain in the back side for your tenants and property managers obviously a very slow process. This is not to mention the chance of getting a couple of low vals that kill your new deal.
    • Concentration risk - if you get into strife you lose options and time as Terry pointed out. Also over a certain amount with any one lender ...say $1.5 - $2 mil is not where you want to be from a risk position. The big institutional loans are often underwritten by a handful of banks to spread the risk. It's like the old adage. If you have a few loans with the bank and you get into difficulties you have a big problem. If the bank has lent out $100,000,000 to a commercial borrower and they get into trouble the bank has a big problem.
    • Servicing constraints - Maybe less of an issue with APRA changes but still things will change with lenders appetites from time to time. If your one lender is in a "we're not wanting new business" mode you're stuck.
    • Expensive LMI - all properties crossed means paying LMI on total exposure for your next loan. Usually way more expensive than stand alone especially if over $1 million in loans.
    • LMI not available - Above certain $ thresholds the lenders lose their underwriting authority with the LMI providers so having all X colled could mean you have to have higher equity across your portfolio as the LMI provider wont approve your next deal even if in bank guidelines.
     
    Last edited: 29th Oct, 2015
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  3. Perthguy

    Perthguy Well-Known Member

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    Something I was not comfortable with was my investment partner crossing his unencumbered main residence with our new investment property. Our mortgage broker explained the risks and we left it up to him to make the decision. It worked out and he didn't get burned this time but IMO it is an incredibly risky strategy and I won't let him do it again. We went 105% on the IP. The risk if things went wrong is that he loses his house, literally. I would suggest that it's not wise for people to gamble their home on an investment property going up in value. There are other options that are less risky.

    Of course we refinanced as soon afterwards as possible. I think just over 3 years. So now the property is not crossed and I plan to keep it that way! :)
     
  4. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I wonder what percentage of people who own more than 2 properties cross. It would be the majority I think.
     
  5. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    And the majority of that majority would have no idea.
     
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  6. Coota9

    Coota9 Well-Known Member

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    @York Polides you had experience with this first hand?
     
  7. Phantom

    Phantom Well-Known Member

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    Yep. Had my first IP crossed with PPOR. I didn't know any better. When I tried to get finance for 2nd IP, they tried to cross me again. But by then, I knew better.
     
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  8. albanga

    albanga Well-Known Member

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    I have been a member for close to two years now and I have well and truly read and understood the perils of X-Colling and I Know that you just DO NOT in almost every situation need to do it.

    But at the risk of opening this right up I'm genuinely interested to know from the brokers here how much first hand experience of issues you have had? Is it one of those things it's only a problem when it is but isn't a problem very often?
    This is no way of me saying I want to/would ever but when someone mentions they are crossed they get the fear of God put in them and I was just wondering of real life experiences how being X turned everything pear shaped? It would be good to have some real life examples so people know more than "just don't do it".
     
  9. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    I've got one.

    A lady came to me in dire financial stress. They have 2 IP's in mining towns which have both have negative equity and been crossed with their PPOR.

    PPOR has loads of equity. IO terms have expired so all the debt is now on P&I, servicing is all gone, and because of this we can't extend IO terms or refinance despite the fact there is most likely equity to do so.

    The obvious thing to do is sell the PPOR, have loads of cash and stick it in an offset while using it as a buffer until things take a turn for the better. BUT, b/c of the x-coll, any funds will be used to repay the debt on the IP's leaving them with next to nothing to use as a buffer, reducing their deductible debt and leaving them no deposit to buy a new house in the future. Awesome.

    If they do default, they lose their home where if they weren't x-coll they may not, or at least have more time to try and work something out.

    There's a lot more to this story (poor structures, questionable lending practices and so forth) but you get the idea.
     
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  10. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    I've got 4

    1. During the last slump in prices a borrower had a heart attack, business failed as a result. He tried to sell both properties he owned. Sold one. but bank would not discharge mortgage unless he used the sale proceeds to pay down the other loan on the other property. This had dropped in value. Sale fell through. banks ended up taking possession.

    2. Guy with about 10 properties all crossed decided to quit his job and retire early by selling one property every 2 years or so when he ran out of cash. He planned to do this while waiting for the rents to increase and give him enough. 2 years into it he sold and the bank insisted it keep all the proceeds and use that to pay down existing loans - of they would not release mortgage. He wasn't working so they said they had to mitigate their risks by reducing his debt.

    3. Elderly widow too asset rich to get the pension, but rents not enough to live on. She had about 3 properties and needed to sell one to get some money. Guess what? Thats right the bank wanted to keep all proceeds because she could not afford the loans. What would mean she would have to sell a second and he left with 1. She would then have a large sum of cash, but no ability to borrow.

    4. Guy who bought in a mining town. He had done well in acquiring property, but did silly things with his loans. One of his major properties which he paid over $1mil for had dropped to about $600k. All portfolio with same bank and crossed. He could not access the equity in the other properties.
     
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  11. juzzy

    juzzy Well-Known Member

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    So happy I didn't cross after reading the above horror stories!

    I think I might even go with a different lender when it's time to buy IP2, just to be safe!
     
  12. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    People often think the only down side is the bank possession if you cannot keep paying. But crossing can ruin your retirement plans.
     
  13. tobe

    tobe Well-Known Member

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    Had a few examples of having part fixed and not being able to break because of xcoll. 2 examples of large IP investors snookered because of xcoll, one just trying to continue to grow and the other trying to buy downsize PPOR.

    The main thing I notice with clients who are xcoll is financial literacy. The xcolled clients I see have handed over their decision to the previous broker or banker, and 'don't know what they don't know'. This is either because the previous lender hasn't bothered explaining anything to them, (using the old peer over your glasses and look like a banker trick), or the client hasn't wanted to know. They were quite happy to have everything 'taken care of' for them.

    Sometimes it seems like deliberate deception, Ive heard stories of clients being told if they take one property to another bank the first bank will close the first loan, they will get a better rate if they xcoll, they will only get the loan if theyy xcoll. Pretty evil IMHO.
     
  14. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    I've got a client right now that I'm uncrossing 3 properties. His previous broker pretty much made out his recent purchase couldn't be done without crossing all 3 properties which is complete rubbish.

    It just meant the broker got his hands on the commission of all three properties in one application rather than one property in two applications.
     
  15. albanga

    albanga Well-Known Member

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    @Jess Peletier @Terry_w @tobe
    Thanks so much for your thorough responses. I think it's important that these stories are shared as it gives more substance to why no one should ever cross. I think the mining examples are a great easy way to explain to people as most will say "but yeah property doubles every 7 years so won't be an issue". In these examples those properties aren't doubling EVER and now they are going to lose everything.
     
  16. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I hope there'll be a clawback involved?
     
  17. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    S
    Sure will - the whole lot ;)
     
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  18. sash

    sash Well-Known Member

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    X-coll with one bank.....dumb..dumb...dumb.....

     
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  19. pinewood

    pinewood Well-Known Member

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    Can someone please paint the ideal loan structure for me?? I am so confused. Am trying to uncross my current loan and the more I read the more I don't know what to do. What is the ideal loan and best strategy please?
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    What is ideal for one is not ideal for another.

    Basically -borrow against property A with separate split. Use this as deposit on property B loan with the remainder borrowed against property B itself.

    Broadly speaking that is the ideal loan structure. I am writing a more detailed version and will post next week.
     

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