What is the real problem with Cross Collateralisation? | Andrew Mirams [Podcast]


So really…what is the problem with Cross Collateralisation?

It’s a topic we often discuss on Real Estate Talk which led to an e-mail from Michelle who asked: colourproperty

 “I was interested to hear about Andrew Miram’s warning about cross-collateralization and found myself confused between that and using equity in your home to purchase additional property.

Are you able to elaborate on the distinct difference and potential gray areas between the two?

Where is using equity in an investment property not considered cross-collateralization?”

So in a recent Real Estate Talk show Andrew Mirams answered Michelle’s question.


(Alternatively you can listen to the short podcast at the top)

Andrew:  A brilliant question –  this is still a little area of confusion in the markets. Andrew Mirams_2015_headshot

The key point is whether you have one loan secured by two properties or two properties with individual loans against them.

Kevin:  Is it that simple?

Andrew:  Well, it is to me, but this is what we do.

If you have one loan and there are two properties, and still if you have multiple facilities against that, but there are two properties held, they’re cross-securitized.

What cross-securitized means, or cross-collateralized means, is that there’s more than one property that secures those loans.

The question was: can you use the equity from one property to assist you to buy another property?

That’s not cross-securitized.

That’s using your equity to help you grow your portfolio, and that’s really smart, really strategic.

That’s the way you should be doing it and the way we certainly encourage and advocate doing it.

But not the other way around.

Kevin:  Let’s hypothetically say that Michelle is with lender A on a particular property.

By going to lender A to secure another property, that is cross-collateralization?

Andrew:  Not necessarily.

Not unless they’re using the equity to assist in securing the second property.

Let’s just say, for rough numbers, the home is worth $500,000, and they have a $100,000 loan.

So from bank terms, there’s $300,000 in equity, using an 80% loan to value ratio.

If you then go and you buy another property for $500,000, and you finance the $500,000 plus the stamp duties and fees and whatever it costs, it might be about $530,000, $540,000, and you do that all in one loan.

The equity to be able to give you 105% against that property has to come from somewhere, and that’s where they’ll link the two properties together.

A more strategic way would be to take the balance of your equity from property A, as we said, have a line of credit for the $300,000, and then use that as your 20% plus your fees and your contribution into property B for the $500,000.

Do a loan at 80% loan-to-value ratio there, and they’re now very separate.

Still 100% tax deductible because you still used the funds out of property A to be able to buy property B.property investment

But they’re just not linked.

Should one go up or down or you want to sell or refinance because you have some equity gain, they’re not linked, and they can’t be held against each other by doing it that way.

Kevin:  That can be done with the one lender?

Andrew:  Absolutely, yes.

We still do them.

A little golden rule we have with most of our people is somewhere between two and four properties at a lender, because that gives us the opportunity to negotiate great rates, great outcomes for our clients, but also not get too deep into just one lender, and making sure then we look to have some other opportunities with other lenders so that we can at time, whether exploit or whether just take opportunities of different rates or fees or credit policies at times with different lenders.

Kevin:  There you go.

Great question.

Listen to the full show at RealEstateTalk.com.au and while you’re there subscribe and receive our weekly podcast (or the transcripts) where I interview Australia’s leading property experts. 


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'What is the real problem with Cross Collateralisation? | Andrew Mirams [Podcast]' have 2 comments

    Avatar for Kevin Turner

    September 28, 2015 Hamish

    Dear Kevin and Andrew

    I understand the reasons for restricting the loan to a single property. Michael and others advocate using a trust structure as the best way of protecting, retaining and transferring wealth accumulated through property investing.

    I would appreciate some further comments as to how investing using a discretionary or hybrid trust can be used to invest in property, particularly where the investment is a development.

    Banks want more “recourse” to other assets as the LVR increases. The other thing they focus on is serviceability. Less is mentioned about the Debt Service Ratio (DSR) through rent and other income available (e.g. your salary).

    It seems to me that using a non-recourse entity such as a trust makes it harder to get bank finance. The way around this is to provide more of the equity yourself (as per the illustration above) – so how do you get “equity” into a trust and still ensure its tax deductible (assuming we are borrowing against another asset e.g. PPR to fund the investment)? How much equity do you need to put in so the bank will finance the remainder just using the property as security?

    Possible methods could be?
    – use a hybrid trust and subscribe for units?
    – gift it to a discretionary trust?
    – lend it to the discretionary?

    Appreciate your comments on how to avoid cross-collaterisation using a more sophisticated structure.


      September 28, 2015 Michael Yardney

      This is out of the scope of this blog, it really requires specific accounting advice.
      I can tell you that banks won’t lend development finance for hybrid trusts, but do so for discretionary trusts


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