Using Equity for Deposit on IP vs Cross Collateralization

Hi Guys,

I'm researching my next IP, a reno/flip and would like to use equity in my PPOR to lessen my cash deposit so I can keep more in my offset account and fund the reno costs. I spoke to CBA this morning and was told since I intend on selling the property right away, I could just use my PPOR as security and release it once the IP is sold. That way I am not releasing equity in the form of another loan connected to my PPOR.

I have always heard negative things about of cross collateralization, but this does not sound too bad? I also asked what happens if I renovate and can't get a good price to sell, my plan is to hold the IP long term, so how would I release my PPOR as security? She said they would do a bank value of the property (at banks cost) and if I have increased the value by around 30K (purchase price for IP is around 300K) there is some simple forms to fill to release the property. No hidden costs to release my PPOR as security.

Does this sound like a decent option, considering my plan is to try reno then hit the market again in under 3months?
Cheers

 

If you x-coll, the bank holds all your cards. There is literally no advantage and it makes the sales process more complex than it needs to be.

However, SOP for the branch.

 

can u please give us some numbers?

It can work well to secure the whole purchase price against your main residence, but prob best to avoid crossing if you plan to sell.
It shouldn't change the amount of cash in your offset, either way.

 

So you think it'll be smarter to release equity from my PPOR in the form of a 2nd loan on my home then pay it right back after I sell? I'm a little worried about having a 2nd mortgage on my PPOR if I don't intend on selling the IP.

 

IP purchase price will be 260 - 310K range.
PPOR value 645K - Mortgage 470K
Reno est costs 20-30K
Cash 70K (only want to use cash for renovation)
2 other IP but not much equity in them

Can you tell me in what way selling would be an issue for the cross collateralization?

 

The advantage of cross collateralisation is the finance process is a little quicker and easier up front. That's pretty much it.

The disadvantages are numerous, I've seen dozens of examples where people have gotten into trouble by cross collateralising properties. At a fundamental level, it takes away the flexibility in your finance arrangements. This can lead to all sorts of unanticipated problems. I've seen people stuck with lenders that aren't competitive because they can't move, or the lender won't let them sell because there isn't enough equity available after the sale.

Cross collateralisation hands all the finance control to the lender. If at all possible avoid it. It's extremely rare that I've come across a situation where the best solution involved cross collateralisation.

 

If the value of one of the properties that's cross reduces, you may not be able to sell because the LVR on the remaining property might be above 80%. The lender would actually block the sale by not releasing the title.

In another situation I saw, there was plenty of equity and the sale was confirmed, but the lender made the decision that they wanted the borrower to pay down some debt. The lender simply took the profits from the sale and reduced the borrowers remaining loans, completely at the lenders discretion.

The problem with this was the borrower was selling the property to fund another purchase. They were left without funds to complete the new purchase and had to scramble to refinance to another lender to get it all done. They came extremely close to missing out on the deal that ultimately resulted in their financial independence.

 

Should be clarified, there's no 'second mortgage' involved here if you do another loan split for the equity release against the PPOR

Releasing equity in the form of another loan against your PPOR is a much better strategy than offering your whole PPOR as security for the IP, the debt exposure is the same, you're just not cross securing the two properties - recommend you speak to a broker not JUST the bank direct, plenty of good brokers responded above

 

I did speak to a broker, who told me he wasn't really interested because I was intending to sell within the year, aka no commission for him He advised me to go to the big 4.

 

That's one broker's opinion, suggest you try another, the advice you've received to cross secure can leave you stuck if it goes pear shaped, good for the bank, not good for you.

 

I would suggest that if a broker or banker is recommending a structure that involves cross collateralising, they need to be very clear in their justification of why they're making that recommendation.

If they can't justify it, then they're not acting in your best interests and you should deal with someone else.

Cheaper rates or quicker/easier service are not justifications. The loan structure should not affect these variables.

 

I wouldn't cross coll in that situation.

One other advantage of borrowing up to 80% against the main residence is another $46k loan to reuse after the sale of the investment property.
If you can keep paying down the non-deductible debt you will eventually be able to fund the investment property purchases with borrowed money yet not need new loan applications each time.