Cross collateralization

Discussion in 'Finance & Banking' started by C3PO, 12th May, 2017.

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  1. C3PO

    C3PO Well-Known Member

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    Hi all, I am looking at refinancing my loan portfolio and wanted to get some others' thoughts on cross collateralization.

    Currently we have our own home and an investment property, all held with our bank, and all loans are held with the mortgaged properties cross collateralized.

    I have been advised, when refinancing the portfolio, to unwind the cross collateralization of the two mortgaged properties, with the main reason given is that the bank could, if we choose to sell the investment property, force us to use the proceeds of that sale to pay down any of the cross collateralized debt that it chooses.

    Now I get that, but, to be honest, I would have thought there's a pretty low risk of that actually happening.

    So I'm wondering what other arguments there are in favour of unwinding a cross collateralized arrangement?
     
    Last edited by a moderator: 12th May, 2017
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  2. Corey Batt

    Corey Batt Well-Known Member

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    Its not a low risk - the bank gets to decide exactly on where the proceeds of funds go and will not allow a sale of property complete without their terms being met.

    Just a couple of reasons not to cross collaterlise or why you should unravel that future mess:

    • The bank controls more for zero gain on your part - they can tell you what to pay off, how much and when
    • If you want to draw equity or adjust any one of the loans - all properties would need to be reviewed. For instance if you buy another property and it goes up in value, however the valuer comes to your own home and thinks its worth less for whatever reason, they will cancel out any chance of you drawing out equity
    • Less flexibility with moving lenders - if another lender offers you a better valuation or borrowing policy which allows you to move your loan to another lender and make use of that niche, cross coll can force you to not move unless you move everything which the new lender may not have the appetite or need for
    • If property is held across states, this increases government charges with some States. This can equate to $thousands
    Basically you give up any flexibility to move with times and adjust your portfolio as necessary - for what gain? The main reason lenders and even brokers cross collateralise is simple:

    • For banks it gives them the most amount of security and power over the customer to reduce their ability to move etc
    • For (lazy) brokers it means you complete one set of documents and forms, instead of one application per security property
    Cross collateralisation isn't a problem until it is. I've seen many people come through our doors in the current environment who are wanting to untangle their mess, only to be told they can no longer due to the lender and regulatory changes which is making it impossible for them to draw out any equity or borrow further. Fix the mess up whilst its something small - you don't want to regret it later down the track.
     
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  3. Simon Hampel

    Simon Hampel Founder Staff Member

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    This is the key concept people need to understand.

    You'll always find people who have cross collateralised their portfolio and have zero issues.

    But for every one of these, there are just as many horror stories from people who have found themselves in difficulty (or at least having to jump through a lot more hoops or more unexpected costs) when trying to move forward with their plans.

    It's kind of like insurance. You don't need it until you do and there are plenty of people who have never had to use it and therefore thinks it wasn't worth it.
     
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  4. C3PO

    C3PO Well-Known Member

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    In my case, I think the gain has been lower interest rates up to this point, but I can certainly see some merits in the arguments you put forward - thanks Corey & Simon.
     
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  5. Simon Hampel

    Simon Hampel Founder Staff Member

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    If you're only buying a couple of properties and then intend to stop there, then lower interest rates (aka lower cost) will tend to trump most other factors and cross-collateralisation isn't necessarily that much of a big deal.

    However, if you do intend to keep buying, then flexibility becomes far more important than relatively small savings in interest rates.

    This is one thing that frustrates me with the way that the govt (and various "guru" commentators) keep harping on about mortgage brokers not always getting you the cheapest loan ... that simply doesn't take into consideration that "cheapest" isn't always best (although for your average mum & dad buyers it is arguably quite important).
     
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  6. Corey Batt

    Corey Batt Well-Known Member

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    Even then - cheaper interest rates is usually a BS excuse used by lenders/some brokers - there are very very very few lenders which price better for cross collateralised lending compared to standalone. We're talking about 2-3 potential lenders out of a 100.
     
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  7. Terry_w

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

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    I am lawyer and broker and so often get clients contact me who are in trouble because of cross collateralising.

    Here are 2 examples.
    Elderly widow had 4 investment properties all crossed with NAB. She could not get the pension because of failing the assets test, yet her income from rent was no enough to live on. She sold a property and intended to use the proceeds to live on for the next 10 years or so. But after selling she found out the bank would only release the mortgage if she agreed to use the proceeds, all of them, to pay down the remaining loans. The bank's case was that she could not afford to keep the loans as she could not serivce. Not sure how she was supposed to pay the CGT.

    Another similar one with the same bank. Guy had over 10 properties and quit his job never to work again. He calculated he had to sell one property every 5 to 10 years to get enough money to live on. But when he sold the first guess what - he couldn't get any cash from the sale.

    Solution for him was to get a job as he was still young, but an elderly widow who had never worked before this was not an option. She had to sell another property.

    So my advice as a lawyer - don't cross.
     
  8. frank22

    frank22 Well-Known Member

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    If for example you borrow all the funds to purchase a property and use another property that has no mortgage as Cross collateralisation and over a time ,let say 5 years ,equity increases in the property you purchased .Can you request the lender to undo the Cross collateralisation ? because there is enough security due to the increased equity. for eg if you purchase something for $450000 and over 5 years the property is worth $560000.00 that is a LVR of approx 80% ,will that satisfy the bank to return your 2nd security, and you move on to increase your portfolio
     
  9. Terry_w

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

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    You can apply to change the security of the loan as long as the LVR is under 80%.
    Whether the bank will let you will depend though.
     
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  10. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Having said that, many lenders will only allow the same LVR for a substitution, as per the original approval ...........otherwise the want a full app.

    ta
    rolf
     
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