Legal Tip 242: Why is it safer to get all loans with a different lenders?

Discussion in 'Legal Issues' started by Terry_w, 20th Sep, 2019.

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  1. Terry_w

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

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    Legal Tip 240: Why is it safer to get all loans with a different lenders?


    Yesterday I read an article written by a non-lawyer who was claiming cross collateralising securities for loans poses no additional risks to the borrower than does getting loans at different banks. This is not the case. The opposite is in fact trust. It is much riskier.

    All things being equal it would be 'safer' for you to have 4 loans with 4 lenders as if you ever got into real the trouble you could stop paying one and keep paying the others while you sell them.

    If all 4 with one lender, if you start missing repayments you will lose control of all of your loans.


    Example

    Ned has 4 investment properties and 4 loans. Ned's loans were cross collateralised meaning one loan was secured by more than one property - all in this instance.

    Ned’s business goes bad suddenly and he cannot afford to keep paying the loans. He starts defaulting and the bank steps in and takes possession of all of Ned’s properties and sells them. This is the case even though if one was sold he would be back in shape and be able to keep the rest.

    When sold the properties were not tidied up and were sold for less than Ned thought they were worth.

    Ned suffers a large CGT bill as all were sold in the same year.


    If Ned had the loans with 4 different banks the outcome could have been different.

    Example 2

    Homer has 4 identical properties to Ned, but each one is with a different lender. Homer’s business starts to go bad too and he cannot afford to keep paying his loans. What Homer does is sacrifice one property – to the banking gods. He stops paying one and diverts all the rental income to the other 3 property loans. He immediately puts all 3 of these on the market, he might even put the 4th on the market too. It will take about the same time for the bank to take possession of the one property as it would for Ned’s situation. But the loans he continues to pay will not be affected just yet. Assuming the bank does take possession of the property securing the loan he is not paying they will sell it and use the proceeds to pay off the loan and then pursue Homer for any shortfall – probably unlikely to be any shortfall unless he had a high LVR and/or the values had dropped.

    This will take around 6 months as a minimum and by this time Homer would have had ample time to sell the remaining properties. He might choose which properties to sell and which to keep and not have a bank make the decision for him.


    It is generally, way better for an owner to sell their own property rather than a bank because

    a) They can take their time,

    b) Accept unusual offers,

    c) They can reject offers,

    d) Improve the property,

    e) Choose the agent,

    f) Get their own solicitor to draft the contract of sale,

    Etc.


    So when you are considering lenders keep this in mind.
     
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  2. Trainee

    Trainee Well-Known Member

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    Parsing this a little further, terry, what is the difference between a crossed loan and two separate loans with the same lender?
     
  3. Terry_w

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

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    A cross loan has 2 properties (or more) as a legal mortgage. Where there are 2 loans with one lender with each having one separate security they are not crossed as such because one registered mortgage per loan. But there would be clauses in the loan contracts which essentially say any security held by the bank secures all debts to that bank. This is surrogate crossing (a claytons crossing for the older people here - crossing you have when you are not crossing).

    All loans with same bank and not crossed is much better than crossed but safer still if all at separate banks.
     
  4. Trainee

    Trainee Well-Known Member

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    May be a question for the brokers, but.... does the sale of one property (and loan paid out) trigger any reassessment of other non crossed loans held with the same bank? Or is it adhoc and have you seen it happen?
     
  5. Terry_w

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

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    I'm a broker too, although very few of my clients are crossed. Selling a crossed property results in a valuation being done on the remaining property and the remaining loan may also be required to be reduced to make sure the LVRs are less than 80%.

    But it can also trigger a reassessement and the lenders can take all of the proceeds of the sale if they think you cannot afford the repayments on the remaining loan.
    NAB are notorious for this.
     
  6. Peter_Tersteeg

    Peter_Tersteeg Mortgage Broker Business Member

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    Kind of. The bank will want to know that the debt remaining after the sale has enough security to cover it and there's enough serviceability. If these aren't in place, the lender may retain funds from the sale to pay done the remaining debt. I've witnessed this several times.

    Reason 1:
    Cross collateralisation - 10 reasons to avoid

    There are some circumstances where cross collateralisation can be justified, but it's best avoided if possible (and in most cases it is quite easy to avoid).
     
  7. Terry_w

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

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    see Legal Tip 130: What is an All Monies Clause?
     
  8. 27269

    27269 Member

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    In Ned's scenario, depending on the type(s) of property, the bank may also appoint a Receiver / Controller / Agent for the Mortgagee in Possession to sell the property. Their fees can be quite substantial and may eat into the sale proceeds further.
     
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