Cross collateralisation - 10 reasons to avoid

This could be done without crossing securities too.

 

Given that almost every lender can direct debit repayments from a single savings account, and property managers or tenants can deposit their funds into a single savings account, how does a single loan vs multiple loans make things easier? Especially if you've got cash flow?

Incidentally the single transaction account should be offsetting your non-deductible as well.

There's nothing you've described that requires cross collateralisation to make it easier or to achieve and it dramatically increases the risk you're exposed to on multiple fronts.

You've indicated it's easier to access equity by having a single loan. Keep in mind that under this structure to access equity you'll need to revalue every property every time. That's a lot of work and possibly a lot of expense (not the first time you do it in a year, but probably the third or fourth).

Also keep in mind the 7th point I originally made. Property values don't always increase and if one or two of your properties drop in value you might find you don't have much more equity overall. By not crossing you can pick and choose which properties to access equity in and ignore those that have dropped.

I'm sorry, but true professionals do understand risk mitigation, structuring and knowing how to navigate the good times and bad. Cross collateralising is not a structure for the professionals. It's something implemented by those who don't understand what they're really doing.

 

I know this has probably been touched on BUT why would you need to x-coll? Are there times when it is mandatory? Or certain situations arise?

For example if you subdivide a mortgaged property, I imagine there is no other option but to x-coll the new lots?

 

1. Guarantor home loans for FHB.
2. When you have absolutely no time to release deposits and its purchase with x-coll or don't.
3. Building/purchasing multiple units on one title - yes it will be cross securitised, but post completion/titles issued , if holding all, you can re-do the loan and have individual loans standing against individual titles.

 

We've had a couple of occassions where we've cross colalteralised. Redom has outlined the most common instances which are perfectly legitimate.

Outside of this, we only see a deal about once a year where there is a clear benefit in crossing. The most common of those being where a person is purchasing one property prior to selling an existing one. Not quite a bridging loan, but the concept is the same.

The other instance where I've done it a few times would be when there's lo doc loans involved and it can be almost impossible to release equity at a reasonable cost.

In all cases, it's very easy to structure the loans in a manner which allows you to remove the secondary security very quickly and easily when the time is right, without full reassessment of the loans. It just takes a little forward planning.

 

As a broker I don't think I have ever crossed a loan, but here is a thread about a recent situation where it may be needed:

Loan Tip: A case for Cross Collateralising Loan Tip: A case for Cross Collateralising

No need here. You would split the loan into 2 and have each secured by the separate loan.

Until sub-division it would be one security so technically not crossed but you might have 2 future lots securing one or more loans.

 

I've done a couple:

1. Guarantor loans - plenty of young ones in Sydney need this (most find it difficult to come up with large deposits by their 30th!), parents unwilling to do personal loan approach/won't service for equity release. I think this is a legitimate reason to do it. Always structure to remove guarantor security ASAP though, split the loan, pay down the guarantor split quickly if aligned with goals. I probably do 1 of these a month nowadays, rising in 2016 given shifts in Sydney market.

2. One recently for a customer who was already crossed and doing a top up, international expat deal. Busy customer wanted to avoid loan docs being posted/printed/etc (funds required urgently and conveniently). CBA allow you to do top ups paperless so long as deal remains the same. Pretty awesome process when eligible. Funds banked in <2 weeks for a high flyer in London. Would've taken 3-4 weeks otherwise, printing, etc. Risks were discussed, LVR<50%, customer chose convenience of online docs over structure. Timeline and how to fix when customer returns to Aus in a couple years. As usual, customer didn't know he was crossed by the bank - was sure he wasn't, only to read pre-existing loan contract to see it there.

I've also recently had a displeasure of telling someone they can't release their equity in their own home because they're two mining properties had dropped 100k in value and their previous banker crossed them up. Not fun.

 

There are rare times when it is mandatory. Years ago, myself and investment partner had a number of properties with Wizard that got sold to Aussie, then GE then Pepper. The interest rate skyrocketed to 9.5% and these were all low-doc loans.

Our mortgage broker shopped around a deal to refinance all the loans to full doc and at the same time purchase a new IP. The only lender that would touch this was AMP with 2 conditions: fixing the interest rate on a number of loans and that the new IP loan be cross collateralised with an unencumbered main residence. The MB explained all the of the reasons not to cross collateralise and mapped out a strategy if we decided to.

We went ahead and 3 years later refinanced again to uncross. It worked out and it was straightforward and cheap to do. The refi was less than $1k and the new lender gave us a lower rate. All good... but... there are many things that could have gone wrong and I consider we were lucky, rather than smart. Primarily, we were lucky the new IP went up in value and not down. At risk was my investment partners unencumbered main residence. Worse case scenario is that he could have lost it. That is not a nice position to be in. We won't be cross collateralising again.

I am about to do this but the loans won't be crossed. Lot 1 has a house and a loan and Lot 2 is vacant but soon to have a house. At completion, Lot 1 will have it's own loan (through a valuation and security subsitution) and Lot 2 will have it's own loan (throught a valuation and security subsitution). There is no requirement for the loans to be crossed. If the valuation for Loan 1 comes in a bit low, the value of the loan will be reduced. The issue with crossing is, what if I want to sell 1 and retain the other? That's an issue.

 

Really? How?

 

I would be open to your suggestions.

To answer your question in bold above.. say you have 5 loans and making almost $6900 per month in loan repayments per month. And say the income from the same is $6078 per month.

Now how it is easy is that with this structure, you get to pay $6078 per month into a loan repayment for ONE of those 5 loans only.... this does not even include salaries.

Do you have a better idea on how to do this without crossing?

This is not a margin loan where the values are checked... one you receive a loan based on the valuation completed at the start,that is it.. unless you decide to sell or get a new loan.... only then they would revalue the properties....

Once the debts are paid... the crossing would unwind... no?

 

@poderoso you have the rental income go into an offset account against your non deductible PPOR debt, along with your salary. The repayments for all of the loans comes out of the same account via direct debit. One payment or five, it's all automatic and requires no intervention from the borrower. The $822 shortfall is made up from your salary (which is going to have to happen regardless of the structure).

The additional benefit of this is that all of the income is offsetting non-deductible debt until the repayments are due. If you don't have any non-deductible debt then offset one of the investment loans, preferably the one with the highest interest rate if possible.

If everything is done via direct debit (which almost all lenders require these days), why is one payment easier than five given you don't actually have to do anything because it's all automatic? More importantly, how does one single loan address the 10 risks outlined in the very first post on this thread?

 

You could use lines of credit to pay for interest on all or some loans. But get tax advice before doing this., or doing your advice.

 

Excellent thread - we are currently in the process of getting 2nd IP and have stopped the process while I get this right.

Property A - Bought as PPOR, turned into IP. Bought for $450 K 5 years ago, now valued at 700K+.

Property B - Current PPOR - Bought last year for $800K, now value at $860K. Two loans for Property B, one secured against property A to finance 20% deposit requirement, other secured against property B itself.

Bank is now telling us that we could use equity increase in both properties since last purchase plus new savings of around $40K to get a 3 property for around $500K mark. After seeing this thread, I mentioned to the lender that we didn't want to get into cross collaterals but he says he will do it without cross collacterals and everything will be clean.

Question 1: Does my situation represent an existing cross collateral?

Question 2: What's the way forward if we want to add the 2nd IP or third property? We have an excellent DSR and could borrow an extra $800K depending on equity available and will not prefer going over 20-80 LVR if possible.

Cheers

 

@standtall what you've described can be implemented without cross collateralisation, but the comment, "use equity increase in both properties", suggests that it is leaning towards cross collateralisation.

The existing loans you already have don't appear to be crossed.

To avoid cross collateralisation, you need to borrow against the equity in the existing property which should release that equity as cash. You then pay cash for your deposits and purchase costs on subsequent properties.

 

@standtall
It sounds fine so far except for using savings to purchase, it's unlikely that's necessary but if it is you'd be best of getting some structuring advice as there's right and wrong ways to use cash.

Which lender are you using?

 

A bit confused here. What would be a typical cross collaterlized and non-crosscol scenario in this case and what are the differences? I think I now know the theory but getting lost in how its implemented.

CBA is the bank. Cheers

 

Ok so even though I've read this whole thread I'm not sure I totally understand it. So say you have
Ppor loan = 350k
Ppor value = 550k

You wish to purchase IP1 @ 350k
Now if you cross coll'd you would get a new loan for 105% of IP1.
So ppor loan = 350k
IP1 loan = 365k
Total = 715k

But if you didn't want to cross coll you would have to do some sort of equity release on your ppor loan. So,
Equity release = 85k
Ppor loan increases to 435k
And then use that equity release for your 20% deposit and expenses.
New IP loan = 280k
Is this correct? I am guessing this would be the way to go if they were both IPs but one is a ppor. How do you avoid cross collateralising and still maximize your deductible debt?
Apologies if I am way off the mark!

 

@Lambo the structure isn't quite right, but you're on the right track.

Here's how you fix the structure...

You wouldn't increase the PPOR loan to $435k, instead you'd release the $85k equity as a seprate loan account, so you'd have 2 loans. One for your non deductible debt (original $350k loan) and a second loan for the the IP deposit & costs (the new $85k loan).

From there you get the 80% loan against the IP as you've described.

The reason you use the split arrangement against the PPOR rather than a simple increase is so you can clearly show what money is used for PPOR purposes and what's used for investment purposes. More specifically, showing what money is used for non deductible and fully deductible purposes.

By doing this the $85k loan is tax deductible as well as the $280k new IP loan. You've still got $365k in tax deductible loans, it's just not all in one place.

In summary:

PPOR: $350k non-deductible
$85k deductible

IP: $280k deductible

I might not use the same figures as you've indicated, but that depends more on specific circumstances. Nothing to do with crossing, more to do with LMI. That's a different conversation.

 

Thanks for explaining @Peter_Tersteeg. Haven't checked my loan documents yet but I'm now pretty sure my properties are cross collateralised. They are both IPs with CBA. What's the best option now? Wait till they increase in value then try to un cross them? Would rather not refinance right now.
Will it have any effect if I wish to purchase another IP?