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avoiding cross collateralisation

Discussion in 'Property Finance' started by Brad81, 19th Jun, 2015.

  1. Brad81

    Brad81 Active Member

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    Is the best way to avoid cross collateralisation is to take out an equity manger loan (anz product for eg) as a seperate loan then use that loan as a deposit on my next IP?
     
  2. Redom

    Redom Mortgage Broker Business Member

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    Hey Brad,

    Yes thats the basic idea.

    If you have a PPOR, set up a separate loan for the equity release portion. This can either be a LOC (as you've mentioned) or a simple term loan.

    You then use those funds as the deposit for the next IP.

    If the next IP is with the same bank, make sure they haven't cross securitised it anyway (lots do). Best to read the 'security' section of your loan contract clearly.

    Cheers,
    Redom
     
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  3. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    There's a number of ways you can do it, but fundamentally you access equity in the existing property for the deposit and costs, then get a completely separate loan for the balance against the new property.

    You can access the equity via the equity manager product, but there's plenty of other ways to do it as well. The best method will depend on your own circumstances.
     
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  4. Brad81

    Brad81 Active Member

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    So even if I use this set up they can still cross collateralise if I use the same bank??
     
  5. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hi Brad

    Just ensure you tell the banker/broker you're dealing with that you don't want the properties crossed. I doubt any broker on here would purposely do it - but wouldn't be too certain about others.

    The general set up is:

    PPOR
    Loan 1: Current loan
    Loan 2: Equity release (interest only variable term loan or LOC) to cover deposit/costs on IP

    IP
    Loan 3: Loan for IP (the deposit/costs come from loan above)

    Hope that helps.

    Cheers

    Jamie
     
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  6. Brad81

    Brad81 Active Member

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    Does the applicable costs have to be included in the equity loan (ie deposit) or can they be factored into the IP loan itself??
     
  7. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Costs will come out of the equity loan (assuming you mean stamp duty, legals, etc)

    Cheers

    Jamie
     
  8. Redom

    Redom Mortgage Broker Business Member

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    It can happen mate, the set up you use is the way to set it up for a clean structure.

    Nonetheless, in the loan contracts they can have multiple securities listed.

    Include transaction costs as part of the equity loan. They generally can't be added onto the IP loan itself (without increasing the LVR).

    Cheers,
    Redom
     
  9. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Here's an overview of some of the reasons to avoid cross collateralising.
    https://propertychat.com.au/community/threads/cross-collateralisation-10-reasons-to-avoid.153/

    It's very easy to avoid it, but crossing heavily favours the banks, so often it's the method they'll use to go about structuring your loans by default. If someone is proposing to cross collateralise your loans, they need to explain very, very clearly why and what the strategic benefits to you are. If they can't clearly do this, you're talking to the wrong person.
     
  10. Brad81

    Brad81 Active Member

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    Can I throw a hyperthetical at you all. Approx $40,000 in useable equity. Buying in qld. Not wanting to spend over $350,000 across both loans. Happy at 95% lvr. I guess my question is how do I know what my equity loan amount incl costs end amount will be until I have found the IP. I'm also wanting to get pre approval but to how much If I'm looking to spend only $350,000 all up??
     
  11. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    I think you're trying to figure out how much money you need to put in (from your equity release) to buy a $350k property. It's fairly easy:

    * Figure out the deposit amount you'll contribute (for a 95% lend, you'll contribute the other 5%).
    * Add the purchase costs; stamp duty, transfer costs, conveyancing, etc. For a 95% lend you'll also need to include the LMI.

    The total is the amount you need to contribute.
     
  12. Big Will

    Big Will Well-Known Member

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    If you are not wanting on spending more than $350k I would be looking for a property around $300k as stamp duty will be your largest expense and that is dependable on what property value you buy.
     
  13. Brad81

    Brad81 Active Member

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    Ah yes but I have to draw the equity before I settle on an IP and its price, that's what I don't understand
     
  14. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    You can do it all once - that is, submit two applications. One for the equity release and one for the purchase.

    However - my general advice is to sort out the equity release first because it can take a month to settle.

    Cheers

    Jamie
     
  15. citystar

    citystar Well-Known Member

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    Just imagine the ANZ Equity Manager LOC as a big credit card. Once approved the credit limit is available and you only pay interest on money you have spent so there is no penalty for setting it up early. And as previously stated it's a good idea to set it up well beforehand just in case of delays.
     
  16. Brad81

    Brad81 Active Member

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    Ok understood thank you. This is only the case on LOC which is higher in interest. I assume it's not the case on releasing equity with a standard variable?
     
  17. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    With a standard variable - you pop the funds back in the equity release loan and redraw for future investment use later.
     
  18. Brad81

    Brad81 Active Member

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    Wow ok this is confusing. I'm extremely new to this so stop me if I'm boring you. But could you explain that please Jamie. Would I need a LOC and a variable interest loan for your example?
     
  19. Coota9

    Coota9 Well-Known Member Premium Member

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  20. Jamie Moore

    Jamie Moore MORTGAGE BROKER - AUSTRALIA WIDE Business Member

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    Hey Brad

    Why not get a decent broker to sort it our for you? Then you don't have to worry about setting it up incorrectly.

    Cheers

    Jamie