Why not to cross collateralise your investment loans
Cross collateralisation occurs when the bank uses the security for one loan to secure another loan. What you want to aim for is to have any property you own, investment or otherwise, financed with free standing finance
How cross collateralisation Can It Help You (rarely).
For property investors just starting out, using your home equity can help you get your first investment property most easily. The advantage of using cross collateralisation is that you can borrow 100% or more of the price of your next property plus the costs of purchasing (usually about 5% – 6%).
The reasons for not to cross collateralise are numerous and extremely important.
Here are our top ten to help your finance strategies for moving forward and decreasing your risk.
1) The banks decrease your overall servicing/lending ability the more loans you have. The cost of one rental vacancy may be able to be absorbed, however three rentals vacant would be crippling. Your LVR’s may still be conservative however its higher risk to the banks the more you have.
2) They could force you to sell down some of your portfolio if unforeseen circumstances arose as to maintain their computer generated margins and formulas. Refinancing or a line of credit might be the best short-term option, however the one bank that controls everything might not make this available.
3) You’re not necessarily having available to you the most competitive products on the market. Terms of the loan and interest rates are going to be hard to negotiate if they all ready have you in the door. They may even limit you to principal and interest only to pay down some of the debt. Taking your business elsewhere may motivate them to keep you through renegotiations though!
4) You might not be able to utilize great products like low-documentation or no-documentation if your bank knows through your current loans that you have a paying day job that limits your ability to borrow/service more debt.
5) In the unlikely event that someone sues you, if you have all of your properties crossed (especially with the one lenders) this could leave the door wide open & you could lose the lot especially if you have a lot of overall equity. Not many people like to have all of their properties/loans with the one bank. This is why it is always best to speak with an accountant & solicitor to make sure you are covered in case something like this happens.
6) If you want to realize some increased equity when properties have grown in value you need to have your whole portfolio revalued (multiple valuations instead of one, again an additional and unnecessary cost).
7) When you sell a property in a cross-collateralised structure you may not see any of the funds as the bank may request some or all of it to go back in against the existing loans to strengthen their position. They don’t need your permission either. Picture this you’re releasing one of your properties for an opportunity or worse still a bind, and the bank deducts funds to strengthen their position. Where would that leave you? We have seen this happen to some very asset strong and successful property investors. Answer given, Bank Policy!
8) When you sell a property you have to resign all of the existing mortgages. Extra unnecessary paperwork. You can’t simply just sell the property and release the title to the vendor – 9 times out of 10 you need to re-value ALL properties that the secured against the property your releasing which means extra valuation fees, time & the existing loans usually have to be kept UNDER 80% LVR (or sometimes 60% LVR if its LO DOC)
9) Buying across state boarders you are subject to mortgage document stamp duty of that state, this in itself is OK, but when you have other properties as security for the purchase, regardless of the state they are in you may have to pay the mortgage document stamp duty on the entire loan amount, rather than just on your purchase price. This could triple your stamp duty costs!
10) The biggest disadvantage of crossing your collateralisation is that it ties you to one financial institution. It is so much harder to move banks, if you no longer like or agree with their service or lack of. Control– The one bank can literally have control over your entire portfolio. You wouldn’t hand control over to your hairdresser, so why would you to a bank with no interest in your property goals and aspirations?
Its not to say your current bank is bad, they may have served you well for years, but you now have to ensure your best interests are looked after here and your current bank may not be able or willing to meet your needs going forward while still ensuring their own profit margins.
Banks will naturally assume that you are going to cross collateralise your home to purchase your investment property. By asking that the equity you have in your home or other real assets be made available to you as a LINE OF CREDIT you are put in a much more flexible position.
Remember cross collateralisation(Especially with negative Gearing)can bring your real estate investment financing plans to a standstill.
If you have any questions about your current loans, possible new loans or just want a friendly chat Contact Us Here.