Cross-securitisation and Equity

Hi C

Firstly welcome to the forum and i hope you enjoy your time with us.

Yes you have hit upon one of my biggest bug bears and a practice carried out by lenders and brokers alike through either laziness or lack of knowledge or care. Lenders do it as it provides them with a lot more security than they need but heh more the merrier.

I wrote an article on on the 10 reasons why investor and home owners alike should not cross collatrealise their loans so email me if you would like a copy. Whilst some of the points might be out of date other needed to be added. 

Ok so how to you get around it.

In your situation this is how i would structure the new loan based on the figures you have provided:

1. Take out an equity loan for $100K secured against your PPOR. This loan will be an interest only loan and used to fund the deposit and acquistion costs for the new investment property.

2. With a separate lender take out a standalone loan for the balance of the purchase price of the new investment property. Assume in your case the purchase price was say $400,000 and you have $20,000 in acqusition costs etc. The investment loan would be for $320,000 or say 80%.

As the investment property increases in value draw upto 80% of the increased valuation and use the funds to pay down the equity loan on your PPOR.

These funds can then either be used for the next IP or the loan cancelled.

In an ideal world you would borrow 100% + costs of the IP purchase price secured against the security of the IP solely however in the current finance climate this is not possible so what you need your mortgage broker to do is come up with a solution then gets you as close as can be.

Whilst normally anything over 80% incurs the payment of a LMI premium remember this is not a bad thing and it is an opportunity cost of doing business. If the payment of the premium reduces the exposure or loan secured against your PPOR or if it means you can buy 2 properties instead of one then it is certainly worth considering.

I now i go on about alot on the forum but careful loan structuring is paramount in setting a good investment portfolio and having the ability to grow when you want and not when the Bank tells you can.

Feel free to ask away with any question you might have.

Cheers

Yours in Finance  

As the value o

Cross securitisation is simply using 2 securities for the one loan. So if there is a default the lender can take possession of either property. It also ties you up and restricts your borrowing ability as outlined by Richard.

There is no reason to cross.

Cross securitisation is simply using 2 securities for the one loan.

If you take a LOC out on an existing property you have only used 1 security for this loan so it won't be crossed, but there would be 2 loans on the one property security.

However, if you have 2 properties with some equity in them and then you decide to get a big LOC and use these 2 properties as securities then you will have crossed the securities.

When a lender takes a mortgage over a property they have certain rights such as the right to take possession if you do not keep the repayments up. So, having 2 properties securing one loan can mean the lender can take one or both properties to enforce their rights to sell and recover their money.

They may also be able to get at other property, but only if there is a shortfall and they obtain a judgment against you. They then would need further court orders. So they can get at other property, but it is much more lenghty and complicated and they will just sell the security property first.

A line of credit a secured loan flexible loan facility similar to an overdraft which allows you to come and go as you like.

An effective structure for drawing deposits down and using them for your individual IP acqusitions.

Hope this makes sense.

Cheers

Yours in Finance