Do we cross-callaterise or not ?

Discussion in 'Loans & Mortgage Brokers' started by saintlypaul, 9th Jul, 2019.

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  1. saintlypaul

    saintlypaul Member

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    The situation is as follows:
    My wife and I have our PPOR valued at $1.7 mil with an outstanding balance on Owner Occupied loan of $300k so LVR is 18. Both names on the title. Current interest rate is 3..34%.
    Wife income = 160k. My income = 115k.
    Based on monthly net payments of 10k will probably pay it off in 3-4 years unless circumstances changes.

    My wife has two negatively geared investment properties under her name only with interest only loans that is about to switch to principal and interest early next year. The interest rate is currently ridiculously high at 6.22%.

    Property one valued at 359k with a interest only loan of $330,687 so LVR = 92
    Property two valued at 349k with a interest only loan of $321,501 so LVR = 92

    So total current value of all properties = 2,352,188 with total loan liability of 952,188 making total LVR of 41

    The main aim is to refinance the wifes investment loans maintaining interest only loans for at least another 5 years and bring the ridiculous rate on the investment loans of 6.22% to under 4%. There is no future aim to buy any more properties just to pay off what we have and sell of the two investment properties closer to retirement in lets say 15 years time.

    So we appear to have two approaches we can take:

    Option 1
    Open up a split investment loan against our PPOR loan of 100k to cater for the 85k shortfall to bring the investment property LVR down from 92 to 80

    Refinance the two investment loans with me being included as a co-borrower or guarantor (not sure the difference). So that my wife continues to benefit from the tax deductions.

    Option 2
    Cross-collaterise the PPOR and refinance the two investment loans with me being included as a co-borrower or guarantor (not sure the difference). So that my wife continues to benefit from the tax deductions.

    At the moment the lender looking after our PPOR is also offering a good interest only investment loans of around 3.8%. So do we take option 1 and initiate another split loan of 100k, even though its the same lender.

    Or do we take Option 2 to cross-callaterise even if its the same rate 3.8%

    Or only take option 2 if they are willing for the interest rate to go down closer to owner occupier rates of 3.4% which is supposedly one of the benefits of cross-collaterising

    There is a lot of advice on the internet that says to avoid cross-collaterisation. I understand that Option 1 offers us flexibility to refinance in the future but surely with a low total LVR of 41 does it really make a difference.

    Just looking into what is best for our situation as we are not in a position where we need to cross-collaterise but if its going to offer us some benefit in doing so should we not?

    Thanks
     
  2. Jess Peletier

    Jess Peletier Mortgage Broker & Finance Strategy, Aus Wide! Business Member

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    If the rate is the same, def don't x-coll - there's literally no advantage and a lot of potential disadvantage.

    If the rate is significantly different, I'd still advise to not x-coll.....you just don't know what's around the corner, and tying up the properties just leaves you exposed to the lenders whim. At the end of the day, you need to decide if the rate savings are worth the potential nightmare down the track.
     
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  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    You dont need to cross coll :)

    here is a post from a long while ago

    To cross or not

    and lots more reasons since

    ta
    rolf
     
  4. Terry_w

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

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    Option 3
    refinance the investment loans with security being the main residence,. no cross coll, main residence rates and 2 unencumbere titles.
    The debt recycling away the non-deducitble debt
     
  5. saintlypaul

    saintlypaul Member

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    Uhm it might just be semantics but:
    Security being the main residence for other investment loans = using PPOR for collateral
     
  6. Terry_w

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

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    Yes.
    But what are you getting at?
     
  7. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    Best way I have heard it described

    Collateral under YOUR control and direction

    vs

    Cross coll - collateral under LENDER control and direction



    The bonds of xcoll are often way too weak to be felt until they are too strong to be released...........

    ta
    rolf
     
  8. saintlypaul

    saintlypaul Member

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    I think the confusion lies on what the proper definition is of cross-collaterisation. The definition I have is when there is more than one property used as security\collaterial for a loan.

    So I cant see how your comment:below is possible:
    "refinance the investment loans with security being the main residence,. no cross coll"

    The investment loan contracts will have both the investment property address and the PPOR address listed as security.

    Hence its "Cross -Collaterisation"
     
  9. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    There's got to be a very, very specific reason to cross collateralise and there should also be an exit strategy. A bridging loan or family guarantee would be acceptable reasons for me.

    For the most part though, don't cross collateralise. Even if the rates are higher, this probably only translates a few hundred dollars a year. It may work in the short term, but sooner or later, odds are it will bite you hard. Years down the track there might be some sort of challenge and the cross collateralisation will have taken away the flexibility to deal with it.

    Some might say you can fix it later, but often you can't. Fixing it also takes time and money. Better to just get it right the very first time.
     
  10. Lindsay_W

    Lindsay_W Well-Known Member

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    Classic case of misunderstanding ;)
    Refinance the investment loans so they are secured ONLY by the PPOR - they will still be investment loans but the Investment property will not be used as security.
    My understanding is they will still be 'investment loans' from a tax perspective, so still deductible. This is due to the fact that tax deductiblity is determined by the purpose of the funds ie. what they were used for not what they are secured by - although disclaimer - I'm not a tax accountant so please check that.
     
    Last edited: 9th Jul, 2019
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  11. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Actually not the case in what Terry is proposing. I think he's proposing that the PPOR will be listed as the only security for the loan. The money from the loan will be used to finance the investment property but that doesn't mean the investment property is used as security. It would likely be completely unencumbered and the IP title might be in your sock draw.

    The benefit of this is that some lenders look to the security property to define what the rate is. You're getting an investment loan at PPOR rates. It probably saves at least 0.3%. Not all lenders will do this, but a few do.

    That said, I wouldn't personally feel great about this. I'd rather the loan be secured against an investment property than my home. I want to own my own home outright, the sooner the better and I want to keep it that way.

    This may not be the most financially beneficial approach, but it's more comfortable for me.
     
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  12. Lindsay_W

    Lindsay_W Well-Known Member

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    Terry's strategy is ideal if you want to debt recycle the remaining non-deductible debt
     
    Last edited: 9th Jul, 2019
  13. Terry_w

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

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    That is the correct definition. But I read your post as having a
    Main residence valued at $1.7mil with loans of $300,000 secured against it.

    You also have 2 other loans of about $300k each.

    So if they were all secured against the main residence that would mean $900k/$1.7mil = 53% LVR



    There is no need to use the 2 investment properties as security at all.
     
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  14. saintlypaul

    saintlypaul Member

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    OK thanks I understand now.
    So Option three is refinancing and using our PPOR only as security on each of the two Investment properties, which is what the lender is proposing rather than cross collaterisation. So really I should have written the original post and title better sorry. So I will rewrite the two options below but I think I will need to approach a legal expert to get the right advice.

    The situation is as follows:
    My wife and I have our PPOR valued at $1.7 mil with an outstanding balance on Owner Occupied loan of $300k so LVR is 18. Both names on the title. Current interest rate is 3..34%.
    Wife income = 160k. My income = 115k.
    Based on monthly net payments of 10k will probably pay it off in 3-4 years unless circumstances changes.

    My wife has two negatively geared investment properties under her name acquired pre-marriage only with interest only loans that is about to switch to principal and interest early next year. The interest rate is currently ridiculously high at 6.22%.

    Property one valued at 359k with a interest only loan of $330,687 so LVR = 92
    Property two valued at 349k with a interest only loan of $321,501 so LVR = 92

    So total current value of all properties = 2,352,188 with total loan liability of 952,188 making total LVR of 41

    The main aim is to refinance the wifes investment loans maintaining interest only loans for at least another 5 years and bring the ridiculous rate on the investment loans of 6.22% to under 4%. There is no future aim to buy any more properties just to pay off what we have and sell of the two investment properties closer to retirement in lets say 15 years time.

    So we appear to have two approaches we can take:

    Option 1
    Open up a split investment loan against our PPOR loan of 100k to cater for the 85k shortfall to bring the investment property LVR down from 92 to 80

    Refinance the two investment loans with me being included as a co-borrower or guarantor (not sure the difference). So that my wife continues to benefit from the tax deductions.


    Option 2
    Refinance the two investment loans with PPOR as security on each investment loan and with me being included as a co-borrower or guarantor (not sure the difference). So that my wife continues to benefit from the tax deductions.

    I'm not sure if Option 1 will offer any kind of refinancing flexibility or PPOR protection as both Options is reliant on me being the co-borrower or guarantor to bring the LVR down on the investment loans. Seeing that my wife already has half the PPOR in her name and I as guarantor have the other half of PPOR under my name there is no protection what's so ever anyway.

    So will Option 1 provide any kind of benefit to us?

    Our main aim is to pay off the PPOR in the next 3 years and to refinance the two investment loans to maintain interest only at a lower rate for at least another 5 years.

    If we pay off our PPOR in 3 years but still have the PPOR registered as security for our two investment loans. Does that change anything ?
    The plan it to pay off the PPOR in 3 years then switch one of our investment loans to principal and interest in 3 years time and focus on paying that one off followed by the third and final property thereafter. No more property acquisitions planned.
     
  15. Terry_w

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

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    5 aspects to consider
    a) loan structure
    b) mortgage structure
    c) deductibility of interest
    d) interest rate
    e) risk

    note that a loan and a mortgage are 2 different things.
     
  16. FXD

    FXD Well-Known Member

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    Any other benefits besides interests saving using PPOR rates for investments?

    And what to do with the investment properties equities that have no direct loans against?
    Sooner or later the equities may be put towards more investments in the
    future, and by their nature such equity loans will revert back to investment loan rates again, right?
     
    Last edited: 9th Jul, 2019
  17. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Depending on how the numbers work out, the loan structure might actually be a little cleaner and easier to manage. Overall I don't see that there's any significant advantage other than a small cost saving.

    Yes, you could use the equity in an unencumbered IP for other investments. Most lenders will apply an investment rate when the security property is an investment property, so probably no cost saving there.
     
  18. Arnel

    Arnel Well-Known Member

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  19. saintlypaul

    saintlypaul Member

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    OK I will speak to my wife's accountant and see if Option 1 (taking out an additional 100k investment loan (which will has to be under both our names to bring up the LVR to 80) offers any extra tax benefits for my wife. If it does and as a result enables the two refinanced investment loans to not have to have the PPOR listed on them as collateral and instead just its own investment property address as collateral then it may be a worthwhile option to go with depending on how much interest rates change as a result of this scenario.

    What I'm not sure about is whether the fact that I have to be guarantor/cosigner means that it really makes no difference and that the PPOR MUST be included on the two investment loan documents as collateral anyway ?
     
  20. Terry_w

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

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    There are no tax benefits or differences.