Pros and Cons of Cross-Collateralization

Hi Littlelegz,

   And welcome to you !!   With the equity you have, it seems to me that you don't need (and surely don't WANT) any x-coll.   Crossing properties just adds a level of complexity that will create more problems for you down the track. 

   Also, reading from the more experienced on here, it seems that some banks work with x-coll as a kind of "default setting", so when going for finance, it is important to let them know that you do NOT want the properties to be x-colled.   It means taking two separate loans (even 3?) instead of one – and they might say "there are more costs in setting up three loans" – but stick to your guns.

  I have not heard of too many people who wished they HAD x-colled – quite the opposite.  Have a chat with a good adviser (or take note of the other replies here that are likely to come) and go from there.

  Re "how do I go from there", perhaps check out this thread which (I hope) will grow to encompass a lot of early questions and the answers :-

https://www.propertyinvesting.com/forums/general-property/4349450

Benny

There are so many reasons not to cross loans. Banks have all the control. They can basically dictate to you what to do if you ever decide to sell or try to gain equity (i.e. you might not see the money from a sale or they won't let you access equity as your other propertie(s) have devalued).

Cheers

Tom

Hi Redwood,

  It could be that he did !!   In my earlier days, the broker I used arranged a cross between two IP's I was buying.  The reason given was because of one of the Post Codes.  Certain times (cycles) have banks getting a little more restrictive in their lending, and picking on certain Post Codes (perhaps because of their stats re "defaults" ???).  This may well have been one of those times. 

  Same for you perhaps?

  I sold one of them about 2 years later – but, in the meantime, Brisbane values had soared, and there was heaps of equity in the remaining property for it to stand alone.  So, no harm done (in my case). 

  If you are simply holding on to those two properties, I don't think you would need to rush to "unwind" the cross-coll would you?   Crossing restricts newer investors more than "old hands", so probably no big deal for you (???)

Benny

As a lawyer and broker I would say don't cross. I can see no advantages at all only detriments.

Hi LL,

  I recall a post (I think it is on this site) where a poster called "Dazzling" was able to purchase a huge commercial property with awesome returns by x-colling with his PPOR.  He saw it as a great way to get into something that would otherwise have not been possible.   In effect he was "betting his house" on success with his new purchase…..  and it worked for him.

  And, in my case, it allowed me to buy a property in an area that the Banks were not too thrilled about.  But I crossed with another IP, and NOT my own home.    It paid off in my case too, as it meant I had two properties that benefitted from the boom in Brisbane in the early 2000's.   So, they certainly CAN work in some cases – they are just a bit more work if/when you want to "unwind" them.  

  x-coll can help early investors (on lower wages?) who might otherwise struggle to get a loan.  Of course, they would need to be really sure their move is "high likely profit and low likely risk" before going ahead.   If so, then this can allow their first steps into property investing.

  Do take note of the advisers who have replied too, and their comments – they mention things you need to keep front of mind when going ahead with this….. 

Benny

As a lender what they think.

Spent a long weekend in the Blue Mountains at a conference with the Head of Mortgages for the 6 largest lenders in Oz.

Talking to them about it they thought it was better than an interest rate rise.

Not sure who your Mentor but unless they have a vested interested I would say they are new in the game.

Certainly no added Tax Benefits to cross your loans.

Cheers

Yours in Finance

Cross collateralization is generally a bad idea in most cases; it advantages the banks and disadvantages you a a borrower; eventually you will need to uncross when you sell.

Cross collateralization is more common when business finance is involved and on some rare occasion commercial finance.

Since these are  just  standard residential properties tthan you should and can avoid cross Cross collateralization and still achieve an 100-105% borrowing with no LMI; a much cleaner cut from a tax and loan perspective! and cheaper in the long run.

Yes you are right The New Guy and this is the way it should be.

Cheers

Yours in Finance

How would you set-up the loan for your 1st IP to avoid cross cat?

We owe nothing on our PPOR and were going to use the equity in it for a deposit and have the other 1/2 put in an offset account.

Split loan – one for deposit against PPOR
– One for the IP loan

With an offset account sitting in the middle helping reduce Interest repayments on both loans

Thoughts?