Loan Tip: Cross Collateralisation and Serviceability

Discussion in 'Loans & Mortgage Brokers' started by Terry_w, 12th Jul, 2021.

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  1. Terry_w

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

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    Cross collateralisation refers to using 2 securities for the one loan. i.e. mortgaging 2 (or more) properties for one loan.

    It has no effect on the amount of loan you can service.

    If you don’t have a deposit but equity in another property, you can borrow this under a separate loan or by cross collateralising.


    Example

    Homer has a main residence with a fair bit of equity. His additional borrowing capacity is $500,000 and he wants to buy a property for $500,000

    He has 2 basic choices

    Option A Cross Coll

    Homer uses the main residence plus the investment property as security and borrows $500,000 as one loan.

    Option B avoiding Cross Coll

    Homer borrows $100,000 as a separate loan secured against his main residence.

    Then he borrows $400,000 secured solely on the new investment property.

    He has 2 loans totalling $500,000 with no cross collateralising securities.

    No difference in serviceability
     
    Terry_w, 12th Jul, 2021
    #1
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  2. seadogg14

    seadogg14 Well-Known Member

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    Setup my First IP in this fashion .Looking at releasing equity from the IP 1 to buy my IP 2 and similar setup again, but in this case will have to go 90% LVR on IP 1 for the equity loan and at the same time borrow 90% secured against IP 2.Will this work?
     
    seadogg14, 24th Jul, 2021
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  3. Rolf Latham

    Rolf Latham Inciteful (sic) Staff Member Business Plus Member

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    While the existing 2 props are crossed, drawing equity from either will generally require security from both.

    One BIG issue with crossed loans and LMI is you will pay LMI on the aggregate limit, which can be a drag

    Example Aggregates at a base LVR of 88 %

    at 300 k loan approx premium is 1.3 %
    at 500 1.5 %
    at 750 2 %


    Further, as aggregate limit rises with the same lender the deemed risk increases, with many lenders not being able to approve their own LMI at amount X, the loan gets sent to the LMI provider who may score more harshly.

    Subject to a cost benefit analysis of paying new LMI on the existing or doing a valuer shop and see if its possible to get in under 80 %, it may be wise to clean this up now, because if you are looking to build a portfolio this structure will bite at some time.

    We often end up with scenarios such as this, where clients may even need to sell a property or 2 to be able to move forward beyond their current structure and portfolio value.

    To cross or not

    Near 17 years ago, and a few more issues than in that post these days

    So to close off, yes your plan would work, for the current purchase assuming all else being equal but.............

    ta
    rolf
     
    Rolf Latham, 25th Jul, 2021
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  4. kopi

    kopi Well-Known Member

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    Sorry for the silly question but how would I know if my loans are cross collateralised?
    Is there a quick and easy check? Thanks
     
    kopi, 20th Nov, 2021
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  5. Terry_w

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

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    Yes, look at the loan contract if there is more than 1 security listed it is crossed.

    If you cannot find it ring the lender and ask what is the security for loan xxx
     
    Terry_w, 20th Nov, 2021
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  6. kopi

    kopi Well-Known Member

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    Great. Thanks Terry. I’ll do that

    I have 2 separate loans for 2 properties but both with the same bank.
    But I will check the documents.
    Thanks
     
    kopi, 20th Nov, 2021
    #6
  7. Terry_w

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

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    Also have a read of my tip on all monies clauses - in the legal section
     
    Terry_w, 20th Nov, 2021
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