Loan Tip: A case for Cross Collateralising

Cross Collateralising involves using more than one property for one loan. In the past I have said never cross - but you should never say never as I have just come across a situation in which it may be justified.

Husband and wife team planned ahead with loan structuring, but made one mistake. Properties purchased in sole names and the plan was the buy in the wife's name until she maxed out (could no longer borrow due to servicing limits). This went well and approx 8 properties were acquired over 3 to 4 years.

The mistake was not accessing equity before going on maternity leave and then leave without pay.

Now the husband is ready to purchase, but all their money is tied up in the wife's properties. But because she is not working she cannot borrow.

I see 2 possible solutions.

1. Husband use wife's property to set up a LOC. This will mean wife needs to go on the loan or guarantee the loan.

or

2. Husband buys in his name and uses wife's property as security - ie. the new property and one of wife's property as security. That is cross collateralise.

Option 1 is a bit messy as due to servicing restrictions they may not service if the wife's current debts are taken into account, which is what would happen.

Option 2 may be more simpler because the wife's income is not needed and once the husband's new property increases in value the wife's property can be removed as security for the husband's loan.

 

Could you explain how this would be done: is it a simple process? Any cost linked to that?
Thanks

 

Just contact the lender and ask for a substitution of security. They will need to do a valuation on the remaining property. Minimal costs involved.

 

I know this is the anti-crossing property chat forum but crossing does have its place on occasions. Some of my loans are stand alone and some are crossed. I have never encountered a problem and have been in the finance industry for 20 years. ......... Flame away

 

This is like saying insurance is not needed because none of your properties have ever burned down. Insurance is only needed when these things happen.

Cross coll should be avoided because you can lose more and get controlled more by the banks. You won't realise this until it is too late.

Cross coll should always be avoided - except with the exemption above.

 

Hi @Terry_w , if you don't generally reccomend using one property as security to purchase another...what is the reason for this and what is your reccomended method in lieu of this?

 

Legal Tip 8: The legal side of avoiding cross collateralising properties https://propertychat.com.au/community/threads/legal-tip-8-avoid-cross-collateralising-security-properties.562/

easy to avoid by borrowing against the properties separately. See my ideal loan structure thread
Terryw’s Ideal Loan Structure Terryw’s Ideal Loan Structure

 

Nothing to do with Insurance Terry .... Like I said .... have some crossed and some stand alone ... never had a problem. Also what's to realise about bank controlling you ... if you know what you're doing you won't have a problem .... I've never been controlled by any lender with any purchase or sale

 

It's one of those things that's fine until it isn't.
Often you won't find out there's a problem until things change - for eg, you want to retire, and have a specific plan on how what will happen with your properties during this time. The lenders don't care about your plans, they'll do as they wish. Want the proceeds of an X-coll property to fund your retirement? Don't bet on it - chances are high the funds will be used to pay down remaining debt. Bad luck there, even after 20 years of never having a problem.

 

The insurance was only an analogy - you only need it when problems arise.

I have written 3 examples of actual client situations where cross collateralising has ruined their lives - not sure where I wrote it now.

 

I don't see how p!$$ poor planning is an excuse to cross collateralize?

The example used on the original post is one of convenience rather than necessity.

It doesn't demonstrate how the use of cross col is effective without putting timelines in place. What happens if the couple make a couple of poor purchases and they never have the ability to uncross? They will then have to tip $$$ in.

I don't see the positive effect of this scenario because its based on too many variables and assumptions.

pinkboy

 

What's the alternative?

 

You're trying to justify x-coll in a positive. The example isn't one. Its the same as every other reason for x-col - convenience.

pinkboy

 

I am not trying to justify it, but stating that to keep moving forward they may need to cross because they have little choice.

Of course if they planned ahead this could have been avoided.

 

I have a recent example where X Coll was a positive - building 2 houses. Put them on one loan, because banks charge a monthly fee, a fee for each progress payment (so only pay one each stage instead of 2) and a fee for each reimbursement of 3rd party works, etc.

These saved me thousands in holding costs over the duration of the project.

Then just reval, top up and separate on completion

 

There are also cases where it's justifiable (not a right or a wrong) due to time constraints. If there is no time to arrange a LOC and you will lose the deal if you can't meet the finance deadline.
Both of course can be worked around by better planning but if you are in the situation and it's an all or nothing then cross coll may be a necessary evil.

 

What happens when the val comes up short and you're left with crossed properties?

pinkboy

 

As a worse case scenario - They're in their own trust isolated from everything else, so shouldn't affect anything staying that way until such time as val is good.

 

Terry said -

A simpler way around this would be to access equity from wife's IP with Hubby on the loan to help servicing, then hubby buying the IP himself. No need to X-coll. Only way this wouldn't work is if hubby earns less than wife.

If hubby earns less than wife, then x-coll it is, or sit out until wife is back at work.

 

Circumstances change. What do you do when you need to sell one to pull some of the cash out and the bank wants the big slice?

I still don't see where cross collateralization is positive...

....which is the implied purpose of this post.

pinkboy