Cross collateralisation

Discussion in 'Loans & Mortgage Brokers' started by Jacko, 19th Dec, 2019.

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  1. Jacko

    Jacko Well-Known Member

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    hi all,

    I understand the pitfalls of cross collateraisation mortgages, however, is there anything wrong with having separate mortgages but with the same lender?

    Cheers
     
  2. Terry_w

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

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  3. Jacko

    Jacko Well-Known Member

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  4. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    I think there's a compromise that can be made. Multiple loans with one lender does carry some exposure risk. One lender per loan is almost certainly going to cost more and may be messy in its own right.

    Overall I'd say that 2-3 properties with a single lender is about right for most people, but that depends on the number of properties overall, as well as the size of the loans and the individual's future goals and other financial circumstances.
     
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  5. Terry_w

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

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    Nope, not the same.

    It depends
     
  6. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Xcoll can be poison, but is mostly innocuous until......................

    Problem is most borrowers that persue this model under perhaps questionable Credit Advice, understandable Ignorance , or the usual reason being lazy bankers and brokers, have no context of why it can be an issue.

    98 % of the challenges of xcoll can be overcome with sole security mortgages with the same lender.

    Spreading among a mix of lenders buys time, but not boiler plate security.

    If you default with lender A at an LVR > 75 %, and have a loan with lender A, that spread buys 60 to 90 days before the court judgement initially lodged by lender A attacks the property with lender B.

    ta

    rolf
     
  7. Skinman

    Skinman Well-Known Member

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    Maybe the bigger problem with the the strategy would be that you have got in a position where you are defaulting with a lender rather then the fact you have crossed?
     
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  8. kierank

    kierank Well-Known Member

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    To me, Xcoll is a major issue even if one never defaults.
     
  9. Terry_w

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

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    The issue is not just about defaulting.

    Try selling a property when not working and wanting to live on the proceeds. The lender will be the mortgagee and have the power to grant you your early retirement or to take it away. If not working they will say you cannot afford to make the repayments so they will only release the mortgage if all of the proceeds are used to reduce the debt on the remaining loans.
    This will leave you with nothing to live on and require you to sell another property perhaps - You might go from 4 properties with loans to one property with no loan, and little rental income.
     
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  10. Beano

    Beano Well-Known Member

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    collateralisation
    Reading the above comments it looks like if the financial situation of the borrower is tight or stretched it looks the banks are in control and could force the borrower to top up certain loans (especially with commercial) where as with cross collateralisation they can offset internally.
    Eventually you get out of the cross collateralized loans as the mature portfolio produce so much cashflow , properties are purchased unencumbered.
    The compounded effect of reducing debt and increasing income has a staggering cashflow effect.
    I really chuckle when property mentors say sell down one or two properties on retirement and live of the proceeds.
    It's the exact opposite ...invest more with the surplus!
     
    Last edited: 21st Dec, 2019
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  11. kierank

    kierank Well-Known Member

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    IMHO, even better if one doesn’t enter such an arrangement.
     
  12. Fargo

    Fargo Well-Known Member

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    This is wrong. I have done it 3x in 8 years and could probably do it 2or 3 times now. You make assumptions. If some-one says something it can be repeated over and over until echos around in the group think chamber and it is taken as gospel. There is benefit in having 4+ properties crossed. I am not " working " They never told me I cannot afford to make payments but, they have told me I cant borrow more and access equity ! In the last 8 years I have sold 2 properties that were used to help secure one loan. The loan limit never changed and the LVR was still less than original. Taken the cash, had extra money for living expenses, off set loans decreasing expenses, reducing interest rates (50% less than assumed) and increasing yields (25% + more than assumed), invested some making enough to pay of the whole mortgague and get my capital back. I even mentioned the shares I bought that I did with here and on somersoft.. I have hit an inflection point and have more income than I can spend now. Repeated it 5 years ago by transfering securities decreasing LVR, selling a house on another LOC, kept the cash and the loan stayed the same. The problem is not the security if you get in trouble, the problem is fund allocation, investment performance and risk mitigation.
     
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  13. Fargo

    Fargo Well-Known Member

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    Yes Beano, few people understand the rapid esculation of profits that can be achieved after inflection points are hit.
     
  14. Terry_w

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

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    No it is not wrong!

    I am a lawyer advising in this area and I have had at least 4 clients where this happened to them. Perhaps there are some mortgagees out there who are less risk adverse than others. Releasing a mortgage is at the discretion of the mortgagee.

    What are the benefits of cross collateralising loans?
     
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  15. Beano

    Beano Well-Known Member

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    I had several commercial loans with several banks many moons ago.
    Then one day one bank came up with a very attractive offer a offer I could not refuse . Take out all the other banks and reduce the interest rate on their one.
    Saving was substantial.
    That was then .
    Now the unecumbered properties are over 10 with one over $3m
    The cross collateralized properties I have been able to pull $7m without any updated valuations.
    Touchwood I have yet to see the wrath effects (hope to be debt free before the next crash :) )
     
  16. Beano

    Beano Well-Known Member

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    I was told the benefits on commercial loans are:
    1: lower interest rate
    2: being able to pull equity out with updated valuations
    3: not requiring to top up equity in the event a fall in one or two properties.
    Ps none of this may be relevant to residential as my experience is in commercial
     
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  17. Terry_w

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

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    Yes the only benefit I can think of is lower interest rates. This happens in residential too with some lenders.
    Another potentialy benefit is a parental security guarantee where the parents don't have the ability to borrow anymore - a benefit to the child.

    Pulling out equity should be the same whether crossed or not. It can be better with not crossing as one property may drop and the other increase.

    No margin calls on residential, but this is a good point with commercial.
     
  18. Skinman

    Skinman Well-Known Member

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    I can see there are a lot of different views, opinions and sometimes even facts supporting the pro’s and con’s of x-Coll.

    It just seems the general consensus on here is to focus on the cons and there is always a lot of talk about what “can” happen but only a few examples of when it “does” happen and these generally always seem to have another variable influencing the situation (no job, no buffer, defaults etc) which are a result of other strategy failures.

    I acknowledge my understanding is far more limited than those who are in the finance business so when I started and was putting my structure in place I was advised to cross and did my research and was horrified initially that my advisor had recommended I cross as when you research it seems like the devil himself invented the strategy (maybe that’s what some of you call the banks anyway) :)

    However I listed all my concerns and we discussed them one by one until I was happy as I knew the risks and opportunities and how they applied to my strategy and end goals (so issues such as selling down a few IPs in Retirement to pay off debt across the entire portfolio aren’t an issue)

    By crossing I was able to maximise the serviceability with one particular lender and get my first few IPs under my belt in quick succession this was a positive as the lending environment was already starting to tighten.

    Before I hit the limit with the first lender I was able to pull out a seperate equity loan across the crossed portfolio that allowed me have deposits when i moved to a 2nd tier lender taking out individual loans (not crossed) at 80%LVR for the next few props.

    So far this has worked well for me...am I naive? Will I fall foul of the traps of crossing one day? Maybe...but I will keep going. Maximise cashflow, Continue to pile everything into an offset and volunteer a few loans across from IO to PI if the rates are good enough and stick to my initial strategy aware of the fact there are always risks in investing.

    I also respect all the varied views and opinions on here and it’s what makes it a great place to learn but wanted to say my piece for the pro cross debate team when it aligns to strategy.
     
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  19. Archaon

    Archaon Well-Known Member

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    Its about risk mitigation, and being in control.

    With Xcoll you give up control in bad times.

    If everything keeps going up and up then nothing no amount of risk matters really does it.
     
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  20. Skinman

    Skinman Well-Known Member

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    Yep I agree 100% its a form of risk mitigation but I think there are heaps more risk mitigations that should be applied and monitored to make sure you avoid the bad times at all costs.

    That’s one of the points I was trying to make above. To get to the bad times there have usually been a number of strategic fails in the investment journey already.