Intresting view on cross collateralization

So I was watching YMYC (your money your call) property last night and a question was asked about cross collateralization from a viewer. I was expecting the standard answer in saying its a bad idea but to my surprise an alternate point of view was made. Margaret (hosts) made the point she is cross collateralized across her whole portfolio as it makes it easier to extract equity across her portfolio. She also mentioned that her whole portfolio is with one lender as she gains bargaining power and also gains negotiation power with her lender due to her being a major customer. What is everyone's thoughts on this approach?

 

My view is that x-coll is fine until it isn't. Margaret clearly hasn't hit that point yet. To me, having your whole portfolio with one bank, all x-coll is particularly unwise - they pretty much own you and you are wedded to them and their whims (like random 1% rate hikes, for eg) with potentially very little room to move.

Of course, as your LVR reduces you have more flexibility to leave if you want too, but x-coll still gives the bank the right to have first dibs on your cash when you sell - why do that if you don't have too?

 

I'd say it really depends on each individual needs and strategies, there are no good or bad ways.

a Cross loan can be beneficial if the person is not looking to rush into the market and buy whatever, and have no intention to move house. this person can basically utilize the equity within their property to purchase something that are less volatile and produce a decent amount of income and taking a slower approach to property investment.

While most brokers doesn't like the idea of having all loan within the same bank due to risk distribution, I personally do not think there are any credit risks in Australia and as everyone can see Banks move together whenever there are policy changes, so I don't see how distributing your loans with multiple banks make much difference.

There is another reason why I believe brokers like to spread loans across multiple banks but I believe I shouldn't reveal this publicly.

I do agree that having a large sum of loan with a bank does increase your bargaining power as the more profit you made for the bank, the more bank value your business.

If there are major policy changes with the bank you're with which disadvantage your growth substantially you can always refinance to another bank that suits you, let the other lender know your overall portfolio picture and show them you are keen to move your business they can always look for some special rules for you.

 

Hey ST its quite the opposite - you can do all that you have mentioned without cross securitising the properties.

In fact its quicker to rush the market having the loans standalone. Why? Because when you do an equity release against one property - the lender doesn't order val on all the properties and is only valuing that single property. So you will have access to the funds quicker.

Also another reason why people should access the equity sooner than later even if they don't require the funds today. You never know when your situation or the lender's appetite is going to change.

For what reason do you think brokers like using multiple lenders?

I personally need to use multiple lenders for the following scenarios:

1. Servicing
2. Specific policy (e.g. construction of multi units, specific security type, use of income type, etc)
3. Risk concentration
4. Specific product requirement

This is why multiple lenders are sometimes used.

 

I think that is terrible advice to be giving. For example say you’ve got $3 million worth of loans with CBA. I struggle to understand how having $3 million cross collatorised with CBA would give you any more bargaining power than having $3 million in loans to the CBA with all separate loans. If anything you would have more bargaining power with $3 million worth of separate loans as they know that you’re not locked in with them. The counter argument would be that if the loans were not cross collatorised you wouldn’t be able to borrow $3 million and your serviceability might have been cut off at only $2 million (but that’s when you switch to another lender anyway). The banks know refinancing is a hassle, as is untangling cross collatorised loans, which is exactly the reason they structure it like that. It’s the same as LMI it benefits the bank not the investor. Cross collatorisation is basically just another security measure the banks use to hold power against people. By cross collatorising the loans you’re falling into their web and putting convenience and short term thinking ahead of long term strategy.

 

Maybe her portfolio was not financed solely through the income and/or equity of her properties

 

I see NO benefit in crossing loans.
You can have multiple loans with the same bank if you want to bargain on rates etc.
Having them crossed only benefits the bank. It is more difficult to refinance one loan elsewhere if crossed. I had my first 2 crossed and it took me quite a while to uncross them. When I refinanced 4 loans with Comm they tried to cross them. Luckily I read everything before I sign.
With crossed loans you may decide to sell one property. If it is crossed with, say, 3 other properties the bank will look at the LVR on the 4 properties. If the bank deems that the others have dropped in value they will not "let" you take the left over gain, but can take more of a % to decrease the LVR.

If not crossed, you sell the IP, pay down that one loan and do whatever you want with the rest.
It's a no brainer. Don't do it.

 

Crossing is a nightmare - and it's now become more expensive to fix it!

When you uncross loans - you normally have to set up new accounts. Those new accounts will be subject to the new rates (that have no discretionary discounting) - so if you've got a large, crossed up portfolio with one lender. Trying to untangle it could now become really expensive.

Cheers

Jamie

 

Do NOT cross ever

 

I presume that it was Margaret Lomas making that recommendation? The recommendation needs to be taken in context of her own circumstances.

Margaret has substantial income streams, mostly from her businesses. Combine this with her track record and access to banking for 'sophisticated investors', she's not about to hit a serviceability or even an equity wall. In her circumstances, cross collateralisation gets things done. It's much easier to simply deal with one lender.

It's also not entirely true to say that brokers don't like cross colalteralisation. Crossing loans means we get paid the same, but have to do less paperwork. It also means that our trail income is less likely to be refinanced away by a competitor. The reasons banks like crossing loans could also be applied to brokers.

From a certain perspective, crossing is actually in the brokers interests. The fact that the brokers here tell you it's bad to cross really says that we're putting clients interests ahead of our own financial gain.

It's also worth pointing out that if Margarets lenders decide that they don't want to give her any more money, with her own loans crossed, she'll have almost no way to move forward, it would take years to fix.

 

Will the points you've raised above change in their impact based on the new lending landscape? e.g.

• say you've only got a small portfolio, 2x400k loans with one lender; servicing with another lender takes those at inflated (high interest, 80% rent, etc.), but your original lender may take the existing they hold at actuals, maybe 90% rent, etc. Therefore better to stay?
  
• It's now harder to get equity release unless LVR is 80% or less (and possibly even then for IO?). But having two crossed properties (see above example) with the same lender at LVR 85% may mean the lender would accept a new IP at LVR 80% pushing the two crossed to LVR 88% for equity "release", whereas you can't go to another lender as you can't get the equity actually out of the original lender (since >80%)?
  
• If you're personal policy (#2 above) or product requirement (#4 above) is the same for quite a while: e.g. keep going with 3 bed resi buy and hold within 10-15km of CBD, then once you've found a lender it may be good/useful (based on my 2 previous dot points above) to stick with them and tie your horse to them fully (xcol'ed). After all, a new one may just go a change their policy under you without warning (ahem), just like the existing one may...

So for those without larger portfolios ($2M+) who may make the single lender concerned, and ignoring the excellent point about risk concentration (I agree wholeheartedly), is xcol going to become a bit more useful for those at the start/in the middle of their growth phase in the current and near-future lending climate?

Pardon if the above points make no sense - I'm still at early-learning stage on how things work...

 

Re first point - no lender calculates their own loans at actuals which is why broker use the term " leave the more generous lenders like NAB, Firstmac and Homeloans Ltd towards the end of your portfolio when you need the servicing". But hey we could wake up tomorrow and everyone is calculating debts at benchmarks P&I so it becomes a level playing field.

Re second point - short answer no. In fact having the properties crossed means you will be paying a higher LMI instead of drawing upon the equity separately. Also rules in LMI world have no bearing on whether your loans are crossed or not. Its a very hard and fast rule.

Re third point sure - if there isn't a need to use another lender then no need to. A broker shouldn't be using another lender just to mix up. There should be a specific plan and reason to use lenders (even if its the same lender).

As to sticking with them and crossing - why are you doing this? Neither of your points provides validation on the benefits of crossing. There is simply no need and only potential issues.

Lets say you have a few properties and you want to draw upon the equity against one of them.

If you are not crossed then you simply go to the bank and order a valuation and draw upon the equity. Simple and easy.

If you are crossed with say 6 other properties then the bank orders a valuation against ALL properties. Now what if, and very common, you get a crappy valuation on one of the properties? Then the equity you get is less than scenario one which is having your properties standalone.

Also what if you want to move one of the properties away from the bank or if you sell and then you get a crappy valuation on one of the other properties? The bank is going to take more cash at the time of the sale of the property.

So none of the reasons you have provided justifies anyone crossing their properties.

Great for the bank though.

 

From a legal risk perspective having all loans with the one bank is fairly much the same as having x coll. They can take your other stuff if you default on one.

 

Thanks. i see that, and it helps to see where the first two "benefits" aren't.

Is there a scenario - in this new lending climate - where you simply can't do that "simple and easy" though? Ie. The bank vets whether it will allow the equity based on what you want to do with it - "yes to equity withdrawal, but only if you stay with us for the IP (and possibly xcol)"?

My question probably needs a little crystal ball gazing by the experienced - things have changed, and may change more for investment loans.
Is it likely that xcol may make growing a portfolio and maintaining a buy and hold strategy easier in the new lending climate (not one month/year ago)?

(I should say I'm not xcol with one PPOR and one IP so far, and almost certainly won't be, but I'm trying to understand better the changes happening every day and how they effect strategy )

 

The bank is the boss and put any restriction it likes on lending you the new funds so hypothetically yes they could say that however in reality its rather unlikely that they say that.

In the event they do say that then you need to consider using another lender in which case it goes back to what I was saying which is that its harder to refinance if the loans are crossed.

Im not sure why a correlation is being made with the new changes and cross securitisation - they are 2 separate things. The new APRA changes isn't going to force lenders to start giving advantages to customers that have their properties crossed.

 

I didn't find it difficult to re-fi and uncross at the same time, so it won't necessarily be harder to refinance if the loans are crossed. That said, why take the risk? I was lucky that I only crossed a main residence and one IP. That is what made it easy to uncross. In hindsight though, how risky was that? Anything went wrong with the IP and we could have lost the main residence. I won't be doing that again.

Crossing a whole portfolio would be worse. What if you wanted to sell one of the properties?

 

I do agree that having a large sum of loan with a bank does increase your bargaining power as the more profit you made for the bank, the more bank value your business.

If there are major policy changes with the bank you're with which disadvantage your growth substantially you can always refinance to another bank that suits you, let the other lender know your overall portfolio picture and show them you are keen to move your business they can always look for some special rules for you.[/QUOTE]
How do you know you will be able to refinance with another bank? You cant always refinance with another bank, the time when you need to may be the time when you cant. circumstance can change. If interest rates double no-one may want to refinance you. If you are all tied up with one bank you can reduce your bargaining power. There was a time when banks didn't like to lend over $1.2m and it was disadvantageous to borrow more than that with one bank.

 

Just thinking for my scenario if x-coll would be acceptable. Current Loan is 500k.
My land will be subdivided in about a month in which time Val's will be done.
Estimate is existing block 500k
New block is 300k
Once subdivided I will be selling the front property and paying down most of the loan.

I would think when the new titles are created that it would be easiest to just x-col the 2 properties with the single loan. Or would you brokers reccommend something else?

 

By default after a subdivision like that your loans would be crossed. It would get fairly complicated to avoid crossing in this situation.

Once the subdivision is completed it should be possible to perform partial releases and loan adjustments to remove the cross collateralisation.