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Loan Structure - any concerns with this structure

Discussion in 'Property Finance' started by lisawithane, 15th Aug, 2016.

  1. lisawithane

    lisawithane Well-Known Member

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    I currently have a few investment properties and the structure I currently have is a LOC against our PPOR that was used for the 20% deposit plus stamp duty. 80% loan with another bank with the IP as security. Each investment property is set up this way. Therefore have 2 loans per IP.

    I'm looking to refinance and have been advised to go with a different structure of using the same bank for the whole amount (essentially one loan per property instead of two). This would mainly be secured against the IP but a small amount against the PPOR, until such time the IP has increased in value and the PPOR can be taken off.

    Does anyone use this structure? Is there anything I need to be aware of before going this way? It seems to be reasonable given my current structure is using both the PPOR and IP as security across the two loans but wanted some expert eyes to see if there is something I'm missing

    Thanks
     
  2. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    It appears that they're consolidating debts, being your equity loan for the original deposit, and then the 80% loan for the remainder of the purchase price.

    This relies on each investment property having increased in value enough to support both loans.

    On that basis, it's not a problem as long as the investment properties aren't cross colalteralied. It appears to be a good housekeeping measure.
     
    Last edited: 15th Aug, 2016
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  3. Brady

    Brady Well-Known Member

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    Out of the two senarios the existing strategy is much better. By the sounds you currently don't have any x-coll - keep doing this.

    Is the person who is now suggesting this structure different to the one who set up each of these existing loans. My bet is that they're different people, someone wouldn't go to that effort to then go let's now x-coll.

    Currently your loans aren't crossed, you have the one property securing multiple loans - no problem
    But you're looking at have a loan secured by multiple properties - problem.

    No problem if they're refinancing all to the one lender, refinancing some equity loans (20%+cost) debt that's currently secured against the PPOR onto the IP. But only if they're not crossing
     
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  4. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    It sounds like they are advising you to cross the properties from what you are saying. If this is the case then its a terrible strategy. You can search the forums on the countless number of threads as to why this is a poor loan structure.

    I would personally look at continuing what you are doing but setting it up as a term loan rather than a LOC.

    Who has recommended this strategy to you?
     
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  5. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Agree - this is x-Coll and an all round bad idea. Once your IPs have grown enough, you can top up and pay out the smaller loan then.
     
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  6. lisawithane

    lisawithane Well-Known Member

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    A new mortgage broker has advised to go this way

    The investment properties won't be cross collateralised but each property loan will be secured against the IP for the most part and the PPOR for the remainder which is similar to what I'm doing now except it will be one loan instead of two.
     
  7. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    Sounds like both IPs will be crossed with PPOR. You can't have one loan secured against 2 properties and not be x-Coll.
     
  8. Shahin_Afarin

    Shahin_Afarin Residential and Commercial Broker Business Member

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    Ok just ask them "are you recommending that I cross securitise my properties"? If they say yes then I recommend not following that strategy.
     
  9. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    This is the way I recommended in my ideal loan structure thread and i also have a tax tip on this too.
     
  10. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    I don't think so Terry....one loan per IP, with a 'small' amount secured by the PPOR? Sounds like an uneducated broker to me.
     
  11. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Eqch property now has 2 loans. These loans should be joined together into 1 loan where possible and this loan only secured by the property that it relates too.

    Beware of the tax issues when paying out the mixed LOC.
     
  12. Jess Peletier

    Jess Peletier Mortgage Broker - Australia Wide Business Member

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    The point is that what's being proposed is not only being secured by the one property.
     
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  13. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    I read it differently. Using 2 properties to secure one loan should be avoided.
     
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  14. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Here's the overall scenario my original post was suggesting...

    PPOR: value $500k
    PPOR loan: $200k
    LOC for IP: $100k

    IP: Value $400k
    80% loan: $320k

    Now the IP increases in value to $550k, so you can merge the $100k LOC and the $320k loan together...

    PPOR: value $600k
    PPOR loan: $200k
    LOC for IP: Closed

    IP: Value $550k
    New loan: $420k (less than 80% of total value of IP)

    I'm not sure there's enough clarity in the original post to be sure what's really being done here. It can be read as the broker is trying to cross collateralise (bad), or it can be read as the broker is tidying up the loans but avoiding crossing the properties.

    If you share some actual figures, it would help, or just seek a second opinion (sharing the figures privately).
     
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  15. lisawithane

    lisawithane Well-Known Member

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    Thanks everyone and sorry for the confusion. Am digesting all the information you've given so far and appreciate your feedback. Here's some figures

    PPOR value $1M
    PPOR loan $300K
    LOC for IP1 is $75K
    LOC for IP2 is $70K

    IP1 value $330K
    IP1 loan $230K

    IP2 value $330K
    IP2 loan $233K

    Therefore there are two loans for each property a LOC using equity from PPOR and loan with another bank covering the 80% purchase price. New mortgage broker is advising putting it into 1 loan but will obviously be more than 80% therefore wants to use the PPOR as extra security
     
  16. Brady

    Brady Well-Known Member

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    PPOR value $1M
    PPOR loan $300K
    IHL for IP1 is $41K
    IHL for IP2 is $39K
    - I would look to change LOC > IHLs


    IP1 value $330K
    IP1 loan $264K

    IP2 value $330K
    IP2 loan $264K
    - Increase these up to 80%


    No X-COLL
     
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  17. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    Get a new broker, that's clearly cross collateralising. They probably don't have enough understanding of investors to comprehend how much damage they're doing. This is not the sort of broker a serious property investor should work with.

    Cross collateralising is bad, but putting two properties into 1 loan takes cross collateralising and makes it significantly worse. It's like throwing a nuclear weapon at an incoming asteroid. It's still going to rain big rocks, but now they're radioactive (sorry Bruce Willis).

    Additionally it appears the broker is doing all this to put all your lending under them, which earns them more money. The only benefit to you is a cheaper rate, but at the cost of future flexibility and the possible loss of tax deductions.


    My suggestion would be two phased...

    1. Switch the two LOC accounts to interest only variable loans and negotiate pricing on all the loans with their existing lenders. This will get some immediate savings will very little effort.

    2. Consider waiting 12 months until there's a bit more equity in the IPs, then move to consolidate at a point when each property will take on the full debt on its own, rather than requiring split loans to achieve this. At that point put the total of 3 loans with a single lender to negotiate better pricing again.
     
    Last edited: 15th Aug, 2016
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  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    It can be done without crossing by taking the loans on the ip to 80% lvr and any remainder secured by the main residence under separate splits.
     
  19. lisawithane

    lisawithane Well-Known Member

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    Brady what is "IHL"?
     
  20. Peter_Tersteeg

    Peter_Tersteeg Finance broker and strategist Business Member

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    "Investment Home Loan". Pretty much the straight forward variable loan that most investors take. Much cheaper than a Line Of Credit (LOC).