Loans and Brokers - Eggs in one or many baskets?

Hi everyone

Firstly great forum and I'm thankful that we have such a great resource.

I'm in an interesting situation and keen on some advice. I have a PPOR plus four investment properties - one apartment, one house, and two courtyard houses (torrens titled) which I did through a subdivision over the past two years. My LVR is 73 (but goes to 76 if I was to draw down on the $80,000 remaining in the line of credit).

Earlier this year, one of my loans recently came out of an interest only period - speaking to the broker I used to establish the loan, I was initially told this could be rolled over for a further period of interest only. Long story short I was then told with APRA changes that I would have to do P&I, and that I was at my serviceability limit - I couldn't borrow any more funds to do another project. This surprised me as I'm employed full time, my wife part time (we have two young kids). I listen to a number of the property podcasts and follow some of the better known property gurus, and just can't understand why I've hit this limit.

I've now negotiated a deal with a credit union to take all my business to them - 5 loans and the line of credit account. I've been offered amazingly good rates (I would be saving around $12k in interest and fees alone), but of course they would cross collatoralise the loans. I really really have the property investing bug and would like to do more - including a renovation/sell of a property as an exit strategy into working in property full time - but not sure if this kind of banking arrangement will limit any possible plans to do this. I don't want to sell any of the properties if I can help it - they are effectively my superannuation for years to come!

Sorry for the essay - but keen on any thoughts people might have on financial structure and risks.

Thanks in advance

 

If you cross, your at the lenders mercy when you go to sell, they can retain all monies.

If you fail to pay, everything is at risk.

Read through the finance area of the forum as much as you can, basically best to stagger the lending/lenders & do not just take what one person tells you and try a few brokers who know about investing.

APRA has put a stop to a lot of things, or rather it is slowing things down, over time you can still do things & if developing you may look outside the normal lending practices but at high rates.

 

why do they need to cross coll?

 

If you cross collateralise 4 properties, don't expect to ever use them as a source of equity ever again. Once you reach your affordability limit with that credit union those properties will be locked down and you probably won't be able to get them out.

It's great that they're offering a low rate with interest only terms, but what happens in 5 years when the interest only term expires? The lender will want a new application to renew the IO period and if the serviceability is no longer there (which will become more likely every time a renewal comes up), you'll suddenly have all 4 properties on P&I which will be a serious adjustment of your cash flow.

Moving your entire portfolio to a single lender all at the same time could be a disaster and crossing them all makes it almost a certainty. If you are going to move them:
1. Don't cross collateralise under any circumstances.
2. Stagger it over about 2 years, move a property every 6 months. This way your IO renwal periods will come up in the same way rather than all at once.

This will give you some better flexibility in the future.

 

Really great advice from Peter. When you're at your limits, managing risk and IO periods is paramount. Cost comes after that is achieved.

 

Generally xcross coll is bad, best to use a structured approach. @Corey Batt (who is in Adelaide too) wrote about this here: Building a large portfolio through structured lending | The Frontier Investor

Lender and broker choice is key to building a strong portfolio

 

Another thing, obviously you're not quite at your limits if there's a CU willing to take you on - it may not hurt to get a second opinion and chat about the structure at the same time. Corey is local to you and knows his stuff, and Peter who commented above is also very good so maybe grab a fact find off them and see what some fresh eyes might find..

 

It sounds like at this stage its just a sales pitch from the credit union, you might find they cant actually do what they have indicated. By all means get them to have a go, when and if you have the loan approved, and docs in hand from the credit union, check if they are crossed. if they are, send them back and ask for new docs that aren't crossed.

They wont go back on their approval just because you want to do them stand alone. they might say they cant, but that's just the loan processor whinging about a little extra work reworking the loans.

 

Xing isn't all bad, it can have its advantages and if you have buffers and a strategy in place shouldn't be a problem. If it is you probably already have a problem. With the current service ability requirements it can be impossible to get new loans or access equity, and you could find yourself short on access able money.. I haven't been able to increase loans, but have been able to sell a property take the cash and keep the loan limit the same on one loan. On another loan I sold one property took the cash and 3 years later sold another property sold another property took, more cash while maintaining the loan limit. So now I have 380k in shares, 2 unencumbered properties one yielding 11% .

 

Xcoll doesnt change your serviceability. For some lenders when you sold, they may have released the security and left the loan amount the same without re assessment of your income, but they would have re assessed your equity. Whenever you apply for new finance you would have had to pass the banks serviceability test with or without xcoll. You could have achieved exactly the same result without xcoll.

Its great it worked in your case, but it isn't because you xcolled, its in spite of it. Its just luck that when you sold your other properties retained, or grew in value. Its just luck that your lender is one that doesnt re assess servicability when the security properties change/are sold.

 

There are only a few circumstances where Xcoll makes sense - but they are rare and exceptional.

Off the top of my head ... a couple of examples where XColl may need to happen just to facilitate things...

Let's say you have multiple deals needing to be done within a very short period of time at high LVR's. I had to write finance for 6 purchases for one self employed client within 2 weeks, a couple of years back. They were all 95% + LMI, I/O 10 year deals and we needed a lender that would accept 1 years self employed financials at the time - ANZ. Obviously doing 6 deals back to back at high LVR all at the same time was going to be a credit scoring nightmare, so I did 3 deals using 2 securities for each deal. It kept each deal under $1 Million, allowing for the 95% + LMI and 10 year I/O - oh if only it were still so - but also reduced the number of consecutive loan applications from 6 to 3...

Or let's say you were buying a sub 40M2 studio or some other non standard security type, needed a particular lenders servicing calc and they didnt like sub 40M2 studio's... But you have other blue chip security to offer them.... in that situation you would probably be able to offer them both securities , create a much lower overall LVR, and the non deal suddenly becomes a deal...

Xcoll is only ever warranted to meet a specific , necessary, objective. But generally speaking, Xcoll is a no-no, and unnecessary.

 

Even those two examples don't need to be xcolled I reckon.

Send up 3 apps to ANZ then at approval ask them to seperate the securities out. They don't do another credit hit.

Same with the second example. Either the lender doesn't do small securities or they do them at a low LVR. It would only be useful xcoll ing them if you were seeking an exception to policy, for them to do 80% instead of 70% over the abnormal security fir instance, and in that case, again after approval I'd try my luck at getting them changed to stand alone.

 

The only reasons to cross coll, that I can think of:

1. Family pledge type loan with parents property being used as security.
Ideally the parents would lend money instead, but they may not have any and cannot service so cannot set up a LOC.

2. Having 10 properties with $10,000 equity each - $8,000 may be under the minimum loan size.
(if might be better to wait for some more growth in this case)

3. Spouse A no longer working, Spouse A owns several properties and Spouse B owns nothing.
Spouse B may use Spouse A's property.
(A way around this would be to have A and B set up a joint LOC on one of A's properties. But it may not service if A is involved.)