Ladies & Gents,
After reading many posts I felt that it was time to point out that there are some benefits to cross collateralisation. Most posters don’t like it however there are always both Positives and Negatives to any structure.
Positive 1
Being able to call your bank manager and get approved on the phone. They don’t need statements, they don’t need payslips, they don’t need rates or ID and they can see your accounts with the click of a button. You can get approved within 30 minutes and have contracts within 24 hours of applying (you need a good banker / broker).
Positive 2
If you have 10 properties you do not need 10 loans. You don’t need to cross-collateralise all properties e.g. you could have some crossed and and some alone etc. e.g. keep VIC and QLD properties separate. Keep PPOR uncrossed.
Positive 3
If you have 5 properties with 5 lenders at 80%. 3 years later all properties have gone up in value – you need to lodge 5 applications to 5 lenders to get your equity… not the case when crossed (it's only 1 application)
Keep in mind that as soon as you split your lending the bank managers can no longer see all of your accounts. The amount of paperwork you need sky-rockets – e.g. statements on other bank loans, rates on properties not held by the bank, transaction statements on other bank accounts etc
I’m not going to say there are no downsides however I thought some people might need to hear a different point of view. Cross-collateralising is a double edge sword. It can be a powerful tool if used correctly and have the reverse effect if not structured property.
It's worth pointing out that if you are tight on cashflow the banks might limit your lending. If this is the case it is always good to have some property standalone so it can be moved easily.
Am I the only one that sees benefits in this type of structure???
Banker
I don't beleive there is any benefit in cross collateralising and many problems with it. Of course there are plenty of benefits to the bank – they can get more security than they need and tie the client up further making it harder to leave.
The only possible time I would suggest it is if there are a few properties each with a little bit of equity. Even then it would probably still be better to have 2 x $10,000 loans as opposed to 1 x $20,000 loan.
As to bankers points.
1. I am not sure why CC would save you proving your incomes??? If this would apply to CC why not to stand alone?2. Having 10 loans as opposed to one loan would save on the statements and internet banking time, but does this really matter? It would complicate things at tax time as the interest would need to be apportioned between properties.
Also what would happen if you had one big loan and sold one property? How much of the loan do you pay down?
3. If all your loans were with different banks you would need 5 applications, but if 2 or more where with the one bank then you could also use 1 application. If you don't like applying for loans this could be a benefit, but it is only minor.
I can see many more benefits it avoiding CC.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
To throw in my 6 pence worth i actually phoned the local branch of each of the big 5 banks this morning to be told:
1) 4 out of the 5 told me that a formal application would still be required and I would need to come in with my income.
Even as a customer i would need to verify income esepcially being self employed or employed and my pay went into a
difference banks account.Only 1 of the Banks told me that as an existing customer i could be approved for a given amount on the spot.
2) Course Positive point number 2 only works now there is no mortgage stamp duty in most states but is it really a selling point. I agree with Terry if i had C/C loans over my 40 properties i think my Accountant would have a fit.
3) When with most lenders you have to lodge a new application merely to roll over again from the expiry of an interest only period to a further interest only period and that takes time i cannot see any difficulty in having to make 5 separate loan applications.
Maybe time consuming but this is also a customer service orientated industry. We dont always get paid for the level of work we do.
All in all whilst i agree there are times (slim that they maybe) that you would want to C/C your loans in the main i prefer to keep mine and a clients separate.
Richard Taylor | Australia's leading private lender
Only an opinion but CC only has positives for banks. Not borrowers. I'd never, ever, ever do it. Ever.
Terryw wrote:As to bankers points.
1. I am not sure why CC would save you proving your incomes??? If this would apply to CC why not to stand alone?Standalone is fine. If your bank has history of your deposits in their account this is sufficient income verification – all 4 majors.
Terryw wrote:2. Having 10 loans as opposed to one loan would save on the statements and internet banking time, but does this really matter? It would complicate things at tax time as the interest would need to be apportioned between properties.you dont need loans for each property – as long as the split reflect the same tax purposes e.g. investment debt can be bundled. If you need something done fast you dont need statements as the bank already has them. If you have your loans split you need to give each lender copies of each other lender statements – if you want to move quickly on something this can be a nightmare.
Terryw wrote:3. If all your loans were with different banks you would need 5 applications, but if 2 or more where with the one bank then you could also use 1 application. If you don't like applying for loans this could be a benefit, but it is only minor.Banks credit score is affected by level of enquiries on your CRAA. It also means you have a lot more lenders to worry about – it can be hard getting them all to the same party if you need something done quickly
Hi Banker
All valid points. But what about the major downsides of CC?
such as
1) bank may have more security than needed
2) bank may have a choice on which property to repossess
3) bank may not release security for a sale if remaining security is not enough
4) harder to untangle when more properties come along
5) harder to refinance into another lender if need be (eg hit borrowing capacity)Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Qlds007 wrote:To throw in my 6 pence worth i actually phoned the local branch of each of the big 5 banks this morning to be told:1) 4 out of the 5 told me that a formal application would still be required and I would need to come in with my income.
Even as a customer i would need to verify income especially being self employed or employed and my pay went into a
difference banks account.Only 1 of the Banks told me that as an existing customer i could be approved for a given amount on the spot.
Anyone with a good banker will be able to confirm. If they can see you wage deposits in your account that is sufficient income verification. If you are self employed you WILL still need to supply tax returns however if they are already on file you dont need them – e.g. they already have them. Westpac and CBA even scan your financials on to your profile
Qlds007 wrote:2) Course Positive point number 2 only works now there is no mortgage stamp duty in most states but is it really a selling point. I agree with Terry if i had C/C loans over my 40 properties i think my Accountant would have a fit.Richard – you would be mad to cross all 40. As I said you can select the ones that are crossed and the ones that are not. I would personally never cross more than three in a bundle. I would also only cross security in the same state – not just due to stamping issues but it also makes it easier for the banks to attend discharge settlements
Qlds007 wrote:3) When with most lenders you have to lodge a new application merely to roll over again from the expiry of an interest only period to a further interest only period and that takes time i cannot see any difficulty in having to make 5 separate loan applications.thats fine if you are not applying to get equity out. I would not want a new purchase to be reliant of 5 different lenders that are all sharing my equity – what happens if one or two do not come to the party?
Qlds007 wrote:Maybe time consuming but this is also a customer service orientated industry. We dont always get paid for the level of work we do.All in all whilst i agree there are times (slim that they maybe) that you would want to C/C your loans in the main i prefer to keep mine and a clients separate.
This is my point – there are some times where there are advantages – but it is not for everyone.
I know plenty of people – and have had plenty of clients, that can call their banker on a Friday and not only have approval for an Saturday auction – but also an advance for the depoist.
I am talking about people with private bankers, relatinship managers etc – not clients dealing with a branch network.
quote=Terryw Hi Banker
All valid points thank you. But what about the major downsides of CC?
such as1) bank may have more security than needed
If you move security around it is the same amount of security offered. Just to different lenders.
2) bank may have a choice on which property to repossessNot if you don’t cross everything. Keep your PPOR out of the security schedule of investment debt. Bundle in groups of no more than 2-3 properties. You can still keep it with one bank.
3) bank may not release security for a sale if remaining security is not enough
Yes, some times a client borrows 110% of a property and then wants to get another title that is collateral security back without reducing the debt. If the debts were stand alone the other property would have 30% secured against it – therefore you wont get the title back either way. Examples like this provide other financiers and brokers an opportunity to sell the "don’t cross" argument where in reality both properties are required to sustain the debt. Crossed or not!
4) harder to untangle when more properties come alongEasier and faster to apply – take the positive with the negative
5) harder to refinance into another lender if need be (eg hit borrowing capacity)Once again understand your security schedule and you wont have a problem – don’t link more than 2 or 3 securities per loan
eg. You have a $100,000 property with a $20,000 loan
You buy IP 2 for $100,000 and borrow $110,000 using IP 1 and IP 2 as security.
Bank has $200,000 loan to secure a debt of $130,000.If something goes wrong and repayments are not being met the bank can sell IP 1 or IP 2 or both
If you structured it differently you can still get the same result.
Loan 1 = $20,000
Loan 2 = LOC = $60,000 with IP 1 as securityTake money for deposit from loan 2 and buy IP 2
Loan 2 $80,000. security = IP 2 alone.If you can't pay loan 2 the bank can start repossessing properties. But since only 1 has been used as security it can only take this one.
If this is not enough to satisfy the debt the bank can take futher legal action and eventually get orders to sell IP 1, but by keeping the properties separate if buys the borrower time and flexibility – eg they could use some of the money from the LOC to keep bank 2 happy or they could chose to sell their house themselves and get a better price.Not sure I understand your point at 3.
What I was thinking is something like this, which actually happened to someone I know:
PPOR 1 value $100,000 borrows 90%
IP 1 value $100,000 borrows 90%.He gets into financial difficulty and needs to sell an IP. Finds a buyer, but because the market has dropped he can only sell for $90,000. This is enough to pay out his $90,000 loan.
But the other property has dropped too. It is now $90,000 and his loan is $90,000 so the bank will only release IP 1 if he can keep the PPOR loan at 90% LVR. So he has to come up with $9,000 to reduce this loan or he cannot sell IP1.
This actually happened but the numbers were bigger. My mate had no money and had to come up with $40,000 and he had just had a heart attack. He ended up losing the sale and I think he declared bankruptcy.
If he had the loans stand alone he could have just sold IP1 without worrying about the PPOR loan.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Terryw,
Your spot on with regard to a couple of the downsides –
When a client is going bust, has properties reducing in value and cannot service their debt, the bank has more control if crossed. This is why I say to keep the owner occupied out of the mix and to manage which properties you cross and don’t cross. Read the security schedules. Don’t link more that 2 or 3 together.
Here is an example where split banking can work against a client.
Exiting Facilities
Bank 1 – Property 350k Loan at 200k
Bank 2 – Property 250k Loan at 150k
Bank 3 – Property 400k Loan at 300kTotal Property $1.0M and total loans 650k – 65% LVR
Client buyers another two properties for 600k and borrows 80% (480k)
The client needs 120k from the existing properties plus costs – say total 150k (I’m in VIC)Borrowing the 150k would take the existing 3 properties to 80% however you've shot yourself in the foot in terms of speed to market. You have to either lodge 3 applications for increases or refinance your portfolio – expensive and time consuming.
YES there a lot of downsides to cross-collateralising however an advisor should point out the pros and cons of each structure to their clients. Speed to market is important to a lot of my clients. We use cross-collateralising however in a limited capacity. To disregard the benefits in their entirety would be like a builder throwing away a hammer cause he was scarred of hitting his thumb.
Banker
Speed is important. It may be wise to try to have LOCs set up before the client eve starts looking.
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
I am in the process of having my broker untangle mine so I can purchase further properties. Mine were all cross secured I had plenty of excess income to purchase another. Bank said no. I will now have no worries to buy more now they are broken up. In my opinion unless there is absolutely no other way to purchase then don't cross secure. There is no point doing it "just because the bank wants it or it saves a bit of paperwork".
Save paperwork and lock you in so it is hard to leave.
Richard Taylor | Australia's leading private lender
Two interesting articles in "your investment property" June 2009 on this topic.
one article from Bill Zheng founder of Investors Direct why punters should reconsider Cross- Collateralisation.second article was from an investor (Rob williams) who had hit the "servicibility wall" and need to do it to get a deal done.
the only way icould start was to x collateralise or pay a fortune in LMI which i didnt have.now i have equity i have found it sometimes time consuming but have uncrossed,had i listened to the doomsdayers i would have done nothing and not had 5 IPs under management.
Banker,
Finally we have someone who has the balls to stand up to popular belief,
You have mentioned what is only the start in the benefits of crossing- and YES I agree with with the downsides, but as you have stated, as an adviser, all angles and approches to investments must be included. To simply rule out CROSSING, is to short change the potential gains of people, in many instances……
Thank you, Thank you, Thank you, for your interpretation, objectivity, and courage to stand up to what has been a bashing on this site…..
Let me finish by saying I cross on my own investment loans and am better off from this experience- once again, it is not good for all…….
Wife and I set up LOC as described on this forum by Richard, Terry and others, then used the LOC as deposit for our latest IP. We borrowed about 85% for the new unit. Bank wanted to cross-collateralise, and wanted to charge us above $8,000 LMI.
Keeping everything split saved us at least $6,500 in LMI.
So there's another reason to avoid.
Number 8. Would you mind posting some info on how you were better off by cc?
Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
http://www.Structuring.com.au
Email MeLawyer, Mortgage Broker and Tax Advisor (Sydney based but advising Aust wide) http://www.Structuring.com.au
Dan42,
I assure you Banker is not arguing that your personal circumstances require crossing- In fact you would not even consider the idea from the information you have provided. What you have mentioned is correct. We all have our stories. The point he is making is don't bash an idea / concept unless you have considered every angle.
C/C is not evil at every level, and it does provide an avenue for wealth creation for many people.
Just a quick one,
Re-distribtion of credit limits over a portfolio product that allows capitalisation of interest to improve tax deductions and ultimately pay down Owner Occupied (non-tax deductible debt). This is the obvious and simple benefit.
The rest of my life story will take 4 hours to discuss never mind write…..
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