Dan42 – that doesn’t suprise me – there are always reasons / times you are better not to cross. I often avoid crossing for a lot of clients.
You also saw my other post re trusts not always providing the protection people think.I’ve just crossed 5 properties for a client buying in a trust. The reason was this:
4 existing properties all with existing loans with the same bank ranging from 65 – 75% LVR. At the moment none are crossed. We are raising to 80% of all existing properties to get the depoist and costs for the purchase – and borrowing the 80% against the new property..
I have set up 2 new loans.
Loan 1- 80% of the purchase – borrower is company as trustee with director guarantee.
Loan 2 – 20% plus costs – borrower is the company as trustee with director guarantee supported by the mortgages / equity in the other 4 properties.Outcome
– all exisitng debts remain uncrossed
– the 80% loan is uncrossed
– only the 20% plus costs is crossedIf you were to do this without crossing for the one loan, you would have been 4 small loans (one against each of the other properties). This would add a massive load of paper won’t, lots of extra fee (each loan being in the trust name with guarantee etc)
you could of couse have 5 lines of credit in peronal names however if you borrow in personal names and contribute equity in the trust; your equity in unprotected due to being a balance sheet asset to the client. Therefore the trust is largly ineffective from an asset protection point of view.
What I’ve suggested offers protection of not crossing for most of the debts / however crosses tonmake the trust more effective and save a lot of unrequired accounts and fees.
If they sell a property, the client would have to pay out the relivant debt and chip some funds in to the small loan to ensure they are still within 80%. In a couple of years we will revalue the property in the trust and increase that loan to pay outthe 20% plus costs ~ at this point in time the crossed collateralisation will cease to exist.
How would you suggest this could be better structured???
I agree that crossing has plenty of disadvantages and can often be avoided. But there are also times where it can be used to you advantage.
number 8 wrote: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.
I understand that, it's just a personal example of a case where the bank wanted to CC, and we didn't. And we are $6000 better off because of it.
Excuse my spelling. Had to write a long one on iPhone…
Can a property be crossed for 12 months, 2 year time frame? Until the bank is confident there has been enough repayments. Can a property be in the contract as crossed for X amount of time.
Refer example above ( I wrote one yesterday) for an example of short term crossing. You do this by limiting the cross-collateralisation to 1 of the contracts / loans. When that contract is paid / refinanced the balance of debt is uncrossed.
Banker wrote:Refer example above ( I wrote one yesterday) for an example of short term crossing. You do this by limiting the cross-collateralisation to 1 of the contracts / loans. When that contract is paid / refinanced the balance of debt is uncrossed.Sorry… actually did not read that ! Thank you that's excellent.
Banker,Terryw,Qlds007. – great posts ! as someone with a significant cross – collateralise IP portfolio. I am in the middle of aapplying for an increase in LOC with my favourite bank, with a current LVR of 46% & acceptable serviceability, I should be able to report on the outcome next week.
My 10 year personal dealings with my banker, have been tremendously successful however, having all your eggs in one basket however good it might be, does cause me moments of anxiety. For many of the reasons provided by some of you & other respected property finance professionals I am considering un-collateralsing my loans later this year.
I will will give you a hands on report on my success
or ortherwise early next week, keep up the very benificial discussions.AUSMaverick
had to sell a crossed property last year, it was financed before the global financial thingo and i had fixed my rate and put everything with the same bank….
during that time the lvr 's had magically changed so i was unable to pay down my personal mortgage as the funds had to be directed at the other investment property
there were a lot of break fees and lots of small fees ( $ 300 sized ) and charges
i feel i would have achieved a MUCH better result if the one bank didnt have so much control
as a side note……selling the property i had the most equity in and moving the funds around didnt help anyone but the bank
in future i would set up so i could cut the " dogs " loose first
sadly the newer property hadnt grown in equity enough to pay out the break fees , and i had lent everything i could to someone else who was in a crisis….
possibly this is the worst case scenario, but it happened to megood luck with your decisions
That is the biggest risk of cross coll. One of my friends went bankrupt because of it when he could have remained solvent if they had been stand alone.
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
What a topic to get people talking!
Its got to be a 90%-95% sure thing CC isn't a great idea with most people.
If your excuse is extra paperwork-YOUR LAZY.
Banks are finance institutions, they make money from lending money, not necessarily helping you grow your portfolio. They are only interested in making margins from loans and having more control(which they have gained in the last two years by gaining more market share/control)- is a great thing for them. Actually voluntarily giving them more control is ludicrous.
I'm sure i don't want one institution having the controlling say on my investment portfolio. I would rather be insane……
It make the most difference when something goes pear shaped(as noted in above posts) who do you want looking after your best interests? Your finance broker who can do some tweaking to many small loans or a bank "manager" who has to report to his credit department who work from computer calculations and margins etc…….
I even wrote an article about it….
http://investment-mortgages.com.au/loans/dont-cross-collateralise.htmlHi Matt,
Thanks for the post.
It seems that almost everyone has this idea in their head that banks cross collateralise all properties, all the time, without thought as to be benefit / downside of the structure. It simply couldn’t be further from the truth. Most relationship bankers I know prefer not to cross properties for simple transations as it makes their portfolio easier to manage (not crossed) e.g. Future increases / partial discharges etc.
I’m still waiting to see who can give some feedback on the example I listed 5 or 6 posts above – why you would not use crossing in a limited capacity such as this.
The argument that you should not cross all properties with all debt is a no-brainer; of couse it’s a bad idea. However there are also tax problem using cash from other facilities:
e.g. If you have 10 properties, all stand alone and take 5k from each property as a depoist for one new purchase, you can have mixed purpose facilities. If you sell that property in the future each of those 5k’s in no longer tax deductable as the associated investment is sold. You can end up with a huge number of loans with mixed purposes which creates an accounting nightmare.
If you understand when it makes sence to cross e.g. Keeping trusts clean and protecting their assets (refer example above), how to cross in a limited capacity and for a limited time ( refer above), and you also want ensure loans are strutured in the right entity(s). Crossing has benefts.
When you have 2 -3 properties these benefits are not nessisarily relivant however more sophisticated investors with several entities / trusts will have benefits.
If you keep Ll of our loan contracts and can read/ understand the security schedules – you can avoid the common problems.
Hi Banker
Well said.
You are correct. That would be a good example of the 5-10% of the time it might be a better choice of finance structure.Gotta say thanks to all whom have posted on this topic, and especially to Banker who started it. I'm trying to sum up what I've read from this thread and others on PI.com to see if I've got this right.
At the extreme of one loan, one bank and however many properties, the main positive of CC seems to be a simplification of paperwork and dealings with your bank therefore apparently allowing simplier and quicker response to obtaining finance for a venture.
The main negative of CC seem to be less control over your properties due to the bank having complete access to the properties and your finances. Which means they can dictate what to sell and when to sell should something go wrong.
Both the positive and the negative is based on their corresponding positive and negative situations, i.e. the positive is positive in a positive situation while the negative is negative in a negative situation. (Hopefully that has made sense) Therefore of course the arguments would make completely sense in their respective situations, would this be correct?
From the discussion provided, Banker would you be able to confirm that CC is only preferable in a limited number of situations and when only when LVR is at a good rate?
Also from the opposite side (as there is a great deal more of you guys) when we no longer can pay a loan and the bank is looking for more security the benefit of not CC is just to buy time, would that be correct?
or ortherwise 
early next week, keep up the very benificial discussions.
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