Hello there,
I wanted to understand exactly what cross collateral means. I have read few articles and books and they talk about avoiding cross collateral. As so far I am not able to find any benefits of using this technique, apart from being different account management.
I understood the reason to cross collateral of loans is to avoid bankers have access to my security, if I can.
Here is my scenario
PPOR value 375K (258K debt) equity of 117K
I go and tell bank give me 95% equity i have they let me borrow 79.5K. Bank tells me they'll top up my exiting morgagae from 258K to 337.5K (258K + 79.5K). I'll say NO give me as seperate loan and allow me to open another loan account of 79.5K.In this case if I understood right I have avoided cross collateral. regardless of the option I choose bank lends me money only against the security of my PPOR. so if something goes wrong with my 79.5K loan they can still go after my PPOR. have I understadn this correctly?
Is there anything else to this concept?
thanks
Saurinit means using 2 properties to secure one loan.
In your example you may have avoided CC, but you have to be careful as naughty bankers will still try to cross in some instances.
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
hi
thanks for that. as per this scenario I have avoided CC but what are you suggesting is bank if require can have access to my PPOR (as security) if i default on my LOC.
so can I ask what is cross collareral is then. as for this scenario i definatley haven't kept the banks hands off my PPOR even avoiding cross collateral.
thanks
SaurinIf you default on a loan the bank is going to eventually get your other assets, but have a mortgage will make it quicker and easier for them. If a property is mortgaged and you default they can take repossession and sell. If no mortgage they will have to get a judgment against you and then enforce it by applying to seize property etc.
But it is not just this, it is the flexibility of avoid cc that is important. You can move around and sell properties without getting approvals from the bank.
eg imagine if you had a $360,000 loan using 2 properties as security with a value of $200,00 each.
5 years later you want to sell property A for $210,000 and reduce the loan to $160,000. You will need the bank';s permission to do this as they hold the properties as security. Bit of a hassle but nothing major, unless property B has dropped in value. Say it is worth $160,000 now. that would leave the LVR at 100%.In this instance the bank would only allow the release of property A if the loan on property B was paid down to, say, 90%.
This happened to someone I know.If you had avoided CC you would not have a problem – with the bank anyway, but you would still have the problem of owning a house with a value less than the loan. But the bank would not know this.
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
Certain lenders i can think of have CC as a Condition of their Letter of Offer so even splitting the loans doesnt get around the underlying problem.
Cheers
Yours in Finance
Richard Taylor | Australia's leading private lender
Hi Guys,
thanks for your input so far. Cross collateral means using 2 properties to secure one loan.
I think as I am starting out in property investment and using equity from PPOR, i guess regardless the way I arrange, my PPOR will be used as secuity. I think this technique becomes handy when i'll buy my second IP, i will be using equity of my 1st IP rather than 1st IP + PPOR.
Terry, Can you please explain below. I didn't get this.
Terryw wrote:If you had avoided CC you would not have a problem – with the bank anyway, but you would still have the problem of owning a house with a value less than the loan. But the bank would not know this.thanks
SaurinIf 2 houses are cross collateralised, you basically need the banks permission to sell one. This is because the bank holds the title as security. So they will want a valuation on the remaining house to see if it is enough to secure the remaining loan.
If you had 2 houses with the same bank, but not cross collateralised then you don't need to release the 2nd security so no valuations needed.
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
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