Loan Tip: A case for Cross Collateralising

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 3rd Jan, 2016.

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  1. Terry_w

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

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    The purpose of this thread is to show that cross collateralisation may be acceptable in certain instances. Any risks can be weighed up over any potential benefits with each person deciding for themselves whether to proceed.
     
  2. Terry_w

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

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    Yes I considered this - option 2, but in this case it would still fail serviceability.
     
  3. Jess Peletier

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

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    Bum :(
     
  4. MC1

    MC1 Well-Known Member

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    Really .... I'd say if you want to retire your portfolio would be well under 80% where a simple val and discharge would be arranged if you want to sell a property all of which takes approx 10 mins of paperwork to arrange .....
     
  5. Jess Peletier

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

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    That's what you'd think. Reality can be very different.
     
  6. MC1

    MC1 Well-Known Member

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    Ok .... never had an issue though and have arranged that for clients that have been crossed without issue also
     
  7. Terry_w

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

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    I don't think I have ever crossed a client's loan in my 15 years of broking.
     
  8. MC1

    MC1 Well-Known Member

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    I also very rarely cross a loan as well .... but the topic you posted about was not about how many loans you've crossed over your career
     
  9. Terry_w

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

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    Yes, my comment wasn't directed at you, but just as a titbit of information.
     
  10. mrdobalina

    mrdobalina Well-Known Member

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    So just how bad is cross collateralization? How easy/hard is it to uncross the loans?

    I think all my properties are crossed. 11 with one bank, and 5 with another bank :confused:

    Does uncrossing loans require full assessment of serviceability, LVR, etc?
     
  11. Cactus

    Cactus Well-Known Member

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    It's the devil....

    Lol I have 2 properties crossed with one bank and another two with another. Both sets of 2 are identical in every way so I don't really see the issue of one going up and one going down scenario.

    That said I agree it can be a PITA to uncross it took my dad over a week with CBA when he needed to uncross a property.
     
  12. Terry_w

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

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    Its like not having life insurance. Not a problem unless you die.

    Else where I have given 3 examples of people who got into problems with crossing.
    1. went bankrupt
    2. had to sell properties to fund retirement
    3. also had to sell properties or cut the early retirement by going back to work.
     
  13. Terry_w

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

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    Depends. Generally it would be a substitution of security. Loan totals stay the same just new security.

    But if you have to increase one loan to meet LVR requirements it could be a full application.
     
  14. mrdobalina

    mrdobalina Well-Known Member

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    Thanks Terry. Any idea where these examples are?
     
  15. Terry_w

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

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    Nope!
     
  16. Terry_w

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

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    I don't think they are in any of my tips, but in a response to a thread somewhere. I will write them out again and post as a tip. Give me a reminder in a few days if I forget.
     
  17. Jess Peletier

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

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  18. Terry_w

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

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    Thanks Jess, that is a good memory.

    Here is the post I made there - it just has 2 examples:

    Here are 2 real life examples of banks dictating your retirement when crossing.

    Case Study 1.
    Elderly woman owning about 4 properties, living on rents not qualifying for the pension. Slowly loans reverted to PI from IO after the initial 5 year term. Asked bank to renew the IO term, but they refused saying she had no job so they wanted the debt paid down to reduce their risk. Cash crunch kicking in she decided she had to sell just 1 property to release some cash to use to live on, supplemented by the rents.

    Guess what the bank said? When you sell we will only release the mortgage if you use the proceeds to pay down the remaining loans on the other 3 properties. So now she had only 2 choices - 1 get a job, or 2 sell a second property, or maybe a 3rd and end up with just 1 property fully paid off - no leverage.

    Case Study 2
    younger guy had a large portfolio of property, all slightly negative geared but he had retired with the plan of selling one property every few years and living off the proceeds until the rents increased enough so he could live on the rents solely. he had quit his job and was happily in retirement until the bank said the same thing as case study 1. Not working we will therefore use the proceeds to pay down the loans. That can ruin your retirement.

    Learning from these mistakes:
    1. Never cross and
    2. Extend your IO periods as long as possible just before you quit your job to retire - and
    3. While you are at it increase your loan term as well.

    Cross collateralisation - 10 reasons to avoid
     
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  19. Corey Batt

    Corey Batt Well-Known Member

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    A real life example of the downsides of cross collateralisation.

    I've always like the line "It's not a problem until it is one" with regards to x-coll.
     
  20. mrdobalina

    mrdobalina Well-Known Member

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    Say for example, I've got a property with a loan. House is knocked down and 4 units developed. The construction loan is one loan for the whole construction. After completion, the 4 units are obviously cross collateralized against each other. LVR is <80%.

    Should I be looking to break that cross and have 4 standalone loans for the 4 units?