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Cross collateralisation (whew!!) or x-coll, or cross securitisation.
Cross coll often comes up for mention on here, particularly in an investor's early days.
What is it, and why is it a problem for most investors?
It is often promoted within banks as it is in the bank's favour (NOT yours) to have your properties "crossed". When going for any new loan where you are drawing funds from two properties (say, PPOR for dep/costs and the new IP for 80%) be SURE you let the lender know that you DON'T want the loans "crossed".
Or let your broker handle it (brokers on here would be sure to keep them un-crossed, but an outside broker…. who knows!!)
The following link has several good posts that outline what happens, how x-coll restricts you, and what power it gives a bank. Do take the time to read the whole thread !!
http://www.propertyinvesting.com/forums/finance/4348983
Watch out when a bank or broker wants to put your new borrowings on ONE loan !! It will likely be crossing the properties.
Benny
PS There can SOMETIMES be reasons why x-coll can/should be applied – but these are not that common, and should be considered only after taking advice.
Update Oct15:- The link below has conversations adding information re why/when x-coll can work and its advantages :-
https://www.propertyinvesting.com/topic/4399435-cross-collaterisation-4/
And I will leave the last thoughtful words to Banker who says this“There are benefits to avoiding CC but it comes back to the yin and yang theory. For every positive there will be a negative and vice versa. If you can see one and not the other you are only seeing half of the picture…”
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This reply was modified 10 years, 8 months ago by
Benny. -
This reply was modified 9 years, 1 month ago by Benny. Reason: Adding a further link - Oct15
Hi mixedup,
Quote:Do property values generally go up when a newer suburb/area if developed adjacent?I'd say Yes, but with caveats (below)….. Your comment re infrastructure is a good one, and an area can/will usually grow in value as the amenities grow.
The caveats that I believe will affect the actual result are these:-
1. IF the new subdivision is taking hold, selling well, with not too much discounting, and prices sold in each stage are ticking up a few $k each time, then "Yes, the adjacent suburb will be a beneficiary".
2. Any change may not be immediate, but will take hold over a few years – especially as the new suburb becomes "older" and the location is better in that original suburb. They don't say "Location, location, location" for nothing….
3. Of course, if the whole area (city?) is booming, then the rising tide will lift all boats anyway.
4. As the infrastructure progresses, this becomes a "rising tide" too – all for the good.
5. Land sizes will have an effect over time too – many new subdivisions are on "pocket handkerchiefs", leaving the older suburb with more value as the new properties age.
Benny
Hi Peter,
Welcome aboard !!
In the past, Home Price Guide provided this data – it used to be free, but now costs a bit (I think).The API magazines (Australian Property Investor) also provide a lot of this data. I have some back issues that I would be willing to move on at a really good price if it helps (I bought them regularly between 1999 and ~2005).
Their data would alternate between rental incomes and median values from one issue to the next. These figures would usually include a comparative "12 months prior" set of figures. Data was typically by suburb, so the back issues paint a city-wide perspective if it helps.
I haven't bought them now for some time, so can't comment on what they provide today.
Benny
Hi KSJA,
All good questions mate – the main thing missing is knowledge of the stages required. In simple terms, the first stage is to build your portfolio, the second is to pay down debt (after some time), and the third is to live off the portfolio. There are many questions just to do with the first stage.
But let me give you a "more likely scenario" to ruminate on :-
In these early days, it is all about BUILDING your portfolio. That takes many forms, and will involve building a team of advisers around you, purchasing the right property to suit your end goals, and growing your equity and income as you grow the portfolio. The "Living off rent" bit comes later (think longer-term – like 10 years or so). So, let's build a scenario around those two IP's of yours – you purchased them, got tenants in place, grew a team around you, and are looking to GROW your portfolio – HOW does that happen?
Well, the good thing is that you seem to have some excess cash ($2k a month) that can help you with this. All rent goes into Offset accounts, as does your wage (if you wish, you can even live on credit card for a month, then pull out enough to pay off your card once a month – your whole salary then helps to offset the monthly Interest paid, thus needing even less payment to the bank each month). So rather than $400 a month extra helping you to pay less interest, you could be finding $8k a month doing the same job. Howzat???
Then, your Tax Returns allow you to claim any costs on a yearly basis, leading to a substantial refund cheque each year. So the Taxman will help you to grow your portfolio too. Those yearly refund cheques could also add a boost to your Offset account(s).
And then, there is Equity growth – some manufactured by you, and some is created by the RE cycle. Many say houses double in price every 7 – 10 years. Let's say it does take ten years, then let's take a look at your situation after 10 years re those first two properties.
Even if you bought NO MORE IP's in that time, their values would have doubled, but your amount owing remains the same. So, you are holding 2 x $700k properties (assuming they were worth $350k when you bought them). But you only owe $300k on each. If you simply sold them for $1.4m, after CGT, selling costs, paying the bank its $600k, etc you could likely walk away with around $400k – your "savings" over that 10 years if you like. But wait, you have an Offset account with a chunk of change in it – close to half a mill (see below), so you have nearer $900k to do something with. So that is $90k a year you have gained over those ten years – better than most wages.
But then, WHAT IF YOU KEPT THEM?? After 10 years of "saving" in your Offset, let's take a look at a likely situation – let's see now:-
1. 10 years of "an extra $400 a month in rent" x2 = $96k (that's assuming the rents NEVER went UP !!!)
2. 10 years of "an extra $2k a month you can afford" = $240k
3. 10 years of "Tax refund cheques" – let's say = $100k (not unrealistic, especially on your high rate of pay – it could be unrealistically LOW, depending on the properties).
At this point, your savings in Offset have reached $436k – almost enough to pay off one-and-a-half loans completely. You would at this point only be paying the Interest on $164k for two properties ($82k each).
OK, it was long-winded, and NOT complete. Just the fact that the Interest paid goes down monthly means your Offset amount increases more each month to save even more Interest. So, even if Rents didn't increase, the amount going out to the Bank would DECREASE each month. It could be that you would have enough in Offset to pay them both off. Thus, you have $1.4m in Equity in 10 years – or a gain of $140k per year !!! Howzat???
Of course, rents WOULD usually be growing, and hopefully your wage too – so these are "worst case" figures.
Now work out just how much of that $140k came from you.
What if you did use equity gains to buy 3, 4, or 5 properties? Yes, it would appear to slow your initial growth, but the final outcome would be even more impressive.
I'll leave it at that (the audience sighs with relief….
) – consider just what can be achieved in a relatively short period of time by buckling down now.I'm glad the early answers led to more questions – that's how we learn…. and it shows you are eager for answers too.
Benny
I wonder if Harry Dent might take the challenge to walk backward up Mt Kosciusko if the bubble hasn't burst by 1 Jan 2017 ????
Benny
Hi Matt,
All good questions – once you have your head around it, things will all start to make sense. For now, let me say it "my way", and see if you can relate to my words. Sometimes we need to hear the information in different words before we "get it"….. Here I go :-
Quote:If I was just paying off interest only loan and putting my money into offset is that kind of like having a savings??Yes, it can be seen to be like that. With an Offset though, you have significant benefits :-
A Savings account might give you 1% Interest pa (if you are lucky). THEN you must pay Tax on that Interest paid to you. With an Offset, your Interest Rate is whatever your Home Loan is – so more like 5%, with NO Tax to be paid on your "earnings", as no Interest is paid back to you from the Bank (you have reduced the Interest owing, rather than you paying FULL Interest and the Bank "paying you back" as if it were a Savings account).
You have already paid Tax on the $$ that are being used in the Offset account, so they are your $$ to re-use at any time, as you see fit. And yes, they CAN even be used to pay off the Mortgage if you so choose. By not paying it off though, you get the benefit of paying less Mortgage Interest while ever you have funds in Offset. e.g. If your loan is $240k, and your Offset account holds $100k, then you only pay Interest on $140k.
Quote:Because if I have a principle and interest on a $240000 loan and putting my remaining savings into a offset would that be even better and paying less interest???No – and here's why !! Let's say the Interest on $240k (Interest Only) is $12k pa. And the Principal component is an extra (say) $5k pa. You are able to put away $25k pa in your Offset to cover Interest, and save some more $$ too. Near enough? So here's the result from each way :-
Pay off P&I and use Offset for the excess savings :-
You will finish year 2 with Principal owing of less than $230k. You have now given the Bank back over $10k, so it is no longer available for you to call on "at will" – but your Offset still has nearly $16k in it, and is further reducing the Interest paid, meaning your P&I payments are reducing your Principal even more…
Pay IO and put all savings into Offset as before :-
End of year 2 – you still owe $240k, but your "extra savings" in Offset (after Interest paid) of $26k have you paying Interest on $214k only. The BIG difference is that you have more than covered a P&I payment, yet have not "locked up" your $$ by officially giving them back to the Bank. At any time, you can choose to "pay it off" (by paying down the Principal) but why would you? With this system, your funds remain "flexible", and able to be used IMMEDIATELY for whatever you choose.
As you can see, your choice is between a way that is fixed (i.e. with P&I you MUST be putting away $17k pa to cover P&I commitments, and would not easily be able to withdraw those payments again if required). If your plan is to (later) make this place into an IP, there are benefits in retaining the mortgage as high as possible.
The other choice is to remain flexible, while "paying lower Interest" by holding your spare cash in the Offset (as though it is paying down the mortgage – it is certainly reducing the Interest payments as though it were "paid down", yes?) If hard times were to hit, your commitment is to make payments of just $12k pa and not $17k. In fact, with the Offset in use, the actual Interest won't be that high – more like $11.2k after 2 years of Offset savings.
So, no nett gains in "paying P&I to reduce Interest", as the Offset does that anyway, while keeping your $$ flexible. You may withdraw ALL of your Offset savings at any time, for any reason (which could include allowing you to buy "the deal of the century, but you must put $$ down TODAY!!"
) You miss it if you had to apply for a Redraw via your Bank….Hope that helps some,
Benny
Hi Daniel,
Quote:the reno i paid cash also burrowed money but that just went stright on to my exsisting mortgage at the time so i have calcuated that in in full as money in the deal !! but i arn't sure to include the reno cost's aswell in to the calcuations as that really changes the CoCRI think the "cash on cash" deals only with your cash in the game, and NOT borrowed money (the latter is considered in ROI). I would think (from your words above) that your cash in the deal might only be $10k. The rest has been borrowed, yes?
Also, it seems your figures "might" include two IP's there. So is $215k the total value of both? Having $95k in Equity is goodness though – travelling well there.
Benny
Hi Hamish,
Welcome aboard !! Of course, family friends only want the best for you – but their answers might be coloured according to their own life experiences. Not that their experiences should be dismissed, but it might help to delve deeper into "Why they think the way they do" and use the results to weigh up against information from here.
Let me point you toward a thread that might help answer some of your questions :-
https://www.propertyinvesting.com/forums/general-property/4349450
See post #3 for the answer to your first question. Other points covered in the linked thread cover questions you might not even know you have yet, but well worth a read to get up to speed a bit quicker.
Quote:I've always seen rent money as dead money but am hoping i can get some help?But then, any interest paid to a Bank could be seen to be equally "dead". There are times when paying rent can actually increase your wealth.
In the end, the right answer is the one you select AFTER seeing things from both sides. Hopefully, the words pointed to in the link will help you understand the financial side of things. But then comes the emotional, lifestyle, family side of things.
Hope it helps,
Benny
Hi Daniel,
Wow, lots of work there !! This introduction of yours leads me to ask you a bit more (I was confused…)
Quote:i bought it 5 years ago for 76,000 i have refinanced and done a whole reno etc now i have tenets in there and the purchurse price i have worked out but geting my new valuation and deducting the current debt and the money used to buy my 2nd ip that was in a LOC line of credit so that left me with a total of 120,000What I am confused about is that it seems you might be including costs from your second IP in the calcs for your 1st. Or, I am misunderstanding the workings in the quote above. For clarification, why not lay out just what each value is :-
Purchase Price = $xxxxxxx
Reno cost = $yyyyyy
Deposit for IP2 = $zzzzzzz
And the total of $120k – what is that made up of? Is that the "total cost of purchase, reno, and….. (anything else) "?
You seem to have garnered a whole bunch of stats – some I have never heard of (must have been a great book !!
) I note the CoCR seems way LOW – but then, you appear to have included a whopping $95k as total cash invested – if that is true, what costs made up that total? The point I am driving at is this – if you are borrowing, then your actual cash might be just 25% of the total purchase price (80% loan, 25% deposit and costs). Of course, you MIGHT have paid all cash….. Yes? Probably not !!
Add a bit more, so we might be able to help a bit more,
Benny
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This reply was modified 10 years, 8 months ago by
Benny.
In the past, Home Price Guide provided this data – it used to be free, but now costs a bit (I think).
