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Cross Collateralisation - how not to

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tallowood | 30 Nov 2012, 12:31 PM Agree 0
Hi there,

I am structuring loans for my first set of IPs. I have fully paid off my PPOR and need to use equity in it to the tune of 20% of the value of each IP. (thus giving an LVR or 80% for each IP)

My accountant advised me not to cross collateralise (CC) the loan(s) because initially I was just going to get one loan for both IP. Apparently by not CC-ing this makes it harder for the bank to force a sale on your PPOR should any loan repayments not be met.

So my question is this - do I need to take out 2 or 3 loans to avoid CC ?
i.e.

Three loan scenario:
1 loan for 80% of IP1 using 80% of the equity in IP1
1 loan for 80% of IP2 using 80% of the equity in IP2
1 loan for 20% of value of (IP1+IP2) using equity from my PPOR (which in total is <80% of its value)

Two loan scenario
1 loan for 100% of IP1 using 80% of the equity in IP1 + 20% equity from my PPOR
1 loan for 100% of IP2 using 80% of the equity in IP2 + 20% equity from my PPOR

I suspect the answer is I need 3 loans because having just two loans causes CC. But I want to double check. The reason I'm confused is that I told my loan officer I didn't want to CC but he recommended 2 loans in response ! (he has a vested interest in CC which is why I don't trust him)

Thanks
  • Eos Property | 13 Dec 2012, 10:42 PM Agree 0
    Not a broker but my preferred option would be a three loan scenario. I would take your business to a broker rather than using a bank loans officer. The bank will be focussed on looking after their interest and not yours.

    Step 1 - set yourself up with a line of credit/equity loan sufficiently large enough to provide your deposit and purchasing costs. Allow about 25% of the purchase cost - if you are going to use a 20% deposit. This loan is secured by your home.
    Step 2 - set up a separate loan for each of your purchases. This/these loans only need to be secured against each of the properties being purchased.

    It is possible to set your LOC and IP loans at the same time. You just need to instruct your broker accordingly.

    Using the loan structure I explained above you can have your LOC and IP loans with different banks.

    Have you considered using 90% loans - while you pay LMI you do consume less of equity with each purchase.

    Kudos to your accountant for ringing the alarm bell for you.

    Hope this helps.
  • Daniel Shillito | 05 Apr 2013, 07:52 PM Agree 0
    Hi Tallowood,

    How have you progressed since your post? Have you purchased 2 properties you might tell us about?

    I would say that the post here from Eos Property (not a broker) is very accurate and a good strategy, assuming your question is to understand the best way to avoid cross-collateralisation when dealing with one bank and several properties.

    If you can avoid one bank holding multiple securities that are all linked to each other (cross-collateralisation) then you have more flexibility. You can refinance each loan separately later on if required, or sell a property at anytime, and potentially have little or no impact on your own home.

    If you are able to achieve this structure all at one bank - that's still ok, although most banks will prefer to cross-collateralise if they have mortgaged your own home previously.

    Having loans at separate banks will provide greater flexibility.

    If you need further advice, it needs to be provided in the context of your overall situation, and a licensed broker is qualified to do that. Let me know if I can help further,

    Kind Regards,
    Daniel Shillito
    daniel@aussiefpgroup.com

    Aussie Finance and Property
    is a trading name of
    My Financial Life Pty Ltd
    Australian Credit License 392084.
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