Cross collateralisation - 10 reasons to avoid

@Lambo if they're cross and you didn't pay LMI, you already have enough equity in them to uncross them. Otherwise you'll probably have to wait until there's an increase in value.

Crossing will have an effect if you want to purchase an IP. Hard to assess what the effect would be without understanding the specifics better.

 

No, unless you mean by repaid, making the last P&I repayment on the whole debt.

If you try to pay the loans by selling one of the properties, or pay one off first (like your PPOR), both of which are common strategies, the crossing certainly doesn't 'unwind'.

The remaining houses are revalued, and the bank controls how much debt is repaid. Depending on the lender and their current policy they may also do new income verification and can change the loan terms at this point (reducing the remaining term to align with likely retirement age or similar).

So you may sell a property and think you can use the proceeds for paying out some debt and the rest for another purpose (such as going part time at work, or taking a sabatical, or moving into development full time etc) but the bank says, no, you have to use all of the sale proceeds to repay part of the loan, and because our policy has changed, we are reducing your remaining loan term to 10years so they will all be paid off before your 'retirement' age.

Now at this point, if for some reason you cant refinance the whole lot to new lenders and restructure the debt, you either have to sell the lot, or keep working for another ten years to pay off the loans in full, without an negative gearing help.

 

From what you are saying, you are crossed already. Property A is linked or crossed with Property B because you have secured it to get the 20%. Any other property purchases they want you to link them as well...

Unless you do as Peter suggests (which is what I have done for all my properties) is to revalue a current place, use the equity to cash out... use that cash as 20% deposit on another, hence having different contracts without the need to use any security other than the existing purchase. If you can avoid LMI, do that with a passion (unless necessary to get you over the line) as it is like throwing money down the toilet and flushing it.... it does NOT protect you in case of default but the bank itself and the criteria gets harder

 

If the 20% deposit is ONLY secured by property A, he's not crossed.

 

Thank @Peter_Tersteeg for the tips.
I have 1 IP currently crossed with my PPOR, I thought it was a good idea then as I could borrow more than 90% without LMI. Fortunately the IP has increased in market value. So what would be the best and most cost effective approach to get out of the x-coll in my case? Should I refi the IP to different lender? is it possible?
Or just do a security variation with current lender, which I think I will be charged for variation fee? The thing is that my guess the IP current value is on the line to just pass the 80% LVR, so quite possible the valuation came back short.
Or possibly any other alternative option, I might not aware of?

 

Why not contact Pete to see what he can do on a refi. You might end up with a better rate and a lender cash incentive.

 

Hi @camp
Cross collateralising doesn't allow you borrow more without LMI, this can be done without crossing. It's simply a lazy practice that gives significant advantage to the lender and is easy to sell to the borrower.

Depending on your equity position, you might be able to do a partical discharge. That would be reasonably quick and simple in this case (it would be considerable more difficult if there were more properties involved however).

This is also a great opportunity to review the loans you've got. Some of the deals available today are significantly better than what was available 2 years ago. It would be worth a call to one of the brokers on the forum.

 

I reckon there is at least another 10

 

"Depending on your equity position, you might be able to do a partical discharge"

Pete, whats a "partical discharge"

Wasnt this originally penned by the Rolfstar?

 

I don't think he has that much pull with the banks. Quite a few have the ability to discharge a single security on their forms, as opposed to all securities. I think the NAB form has an example of this, did two in the last 12 months. One to remove a family guarantee and another where they'd purchased before selling, and later sold. Also did one for Pepper a few weeks ago.

 

How do you uncross if you've cross collateralised two properties with two loans? Whats the process?

 

Get a broker to do it. It can be simple but it can also be very complex.

 

#1 I have sold 3 properties that were crossed. For all of them I was able to put the proceeds in my pocket. The loan amount stayed the same. I didn't have give up any proceeds to repay a loan on the sold property. I didn't qualify for any new loans, but I bought another house with the proceeds. Another property was sold the new property I bought was substituted for security.I bought shares with the proceeds which have done very well. With the proceeds of another property again the loan amount stayed the same and the proceeds where used to build another property which is unencumbered. I would rather have an unencumbered property than not be able to get a new loan to buy at all. #2 I don't remember resigning all the loan papers but it is no big deal or hassle only take a few minutes. #3 You don't have to have all you loans with the one bank or necessarily have all your properties mortgagued . #4 I found when I went to other banks who wanted to uncross they wanted to reduce loan limits. #6 You can still have more than two lenders. All properties don't have to be on the same loan. #7 I have never had the banks charge to revalue property they do it for free . #8 Still happens wether Xed or not #10 see #1 Being crossed enabled me to access capital (growth) and higher income producing assets and not reduce leverage. If you have one property per loan you cant sell a quarter or third of it for cash flow if you do sell you may have little left after you pay out the loan

 

You obviously don't bank with NAB!

I think you were just lucky. The bank could have forced you to pay down the remaining loans with the proceeds of the sale.

Also you could have done the same without crossing.

 

Loan Tip: Uncrossing Crossed Colleralised loans Loan Tip: Uncrossing Crossed Colleralised loans

 

Thanks Terry! Awesome post

 

If we do not use cross security, will the bank charge two package fees?

For example, I am with CBA with their package (~$350/year), they have been trying to setup a cross security IP loan for me. If we as them to setup the IP loan as a stand alone loan, will I need to pay for another wealth package?

Just asking in general with big 4 banks. I'll ask from my lender, just wondering what's the usual way...

 

You must have been with the NAB or their subsidiaries as I have found they are happy to allow the full proceeds on sale (they just check "their is enough equity in the group")
I always remember my banker say .
"Please don't repay the loans . I have to grow my loan portfolio and by you repaying more than your obligation you make make job harder"...Nab subsidiary banker