Structuring loans for investment properties

Yep classic case of cross securitisation and poor loan structuring. Good for the broker and the bank because it will give you less flexibility to move but terrible for you. 

Did you go through longer term planning and discuss your plans with the IP and overall portfolio strategy?

No worries Roxy. I think you'd be best off getting a second opinion on your current loan structure. You might be able to set it up better – which in turn will likely save you some money.

Cheers

Jamie

If the question is whether you should finance your investment properties stand alone or using cross collateralisation?

Using the information you have supplied, in that you have a 20% deposit for each property, you should set up each property with one loan. That is, the security the bank takes will be on that property only. In the event that a default on the loan occurs and the bank calls in its security, you only have the property the loan is associated with at risk of being sold. In the situation where the property is cross collateralized (both properties secure the loan(s) given by the bank), the bank may choose which property(s) to liquidate in order to satisfy the outstanding debt. This is a much less beneficial situation for any investor. Not only that, under a cross collateralised loan position, if you decide to sell a property in your portfolio in the future to release some equity, the bank may decide to apply the equity to the remaining loan in order to reduce your overall LVR against the property(s).

An example may be that you have 2 properties in your portfolio worth $900,000 with a debt against those properties of $600,000 or a 66% LVR. From first glance that would appear as though you have $150,000 equity in each property. However if the loans are cross collateralised and you sell one for $450,000, the situation then looks like this:

Remaining Asset Value – $450,000

Remaining Loan – $150,000

LVR – 33%

You would then have to apply to the bank for a line of credit against the remaining property in order to extract any equity from the portfolio. This is obviously very restrictive in what you are able to do with your money going forward.

Having a 20% deposit for each property will also mean that you won’t need to pay Lenders Mortgage Insurance. That is also a beneficial cost reduction for the accumulation of your property portfolio.

If you have any other questions, just ask and we will do our best to answer it in a non-complex, jargon free format.

Take care.

Story of my life. At least their incompetence keeps us nice and busy

Cheers

Jamie

Agreed it keeps us busy  – currently doing 7 property portfolio with 4 cross coll to a major with those 4 in 5 different security combinations with numerous facilities.  Pretty common. Just curious Roxy how did the broker position that structure to you. Was there a reason?

Hi Shahin,

Doesn't this method breach some taxation law in terms of items which can be tax deductible?

That is, because this is mixing 'Personal' funds in your PPOR with 'Investment'?

Regards

Hi Richard, can you please elaborate how I can do this correctly to be tax compliant?

Even better, borrow to pay IP expenses and save more in the offset